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on Utility Models and Prospect Theory |
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Issue of 2022‒10‒31
nineteen papers chosen by |
| By: | Nicolas Gravel (Aix-Marseille Univ, CNRS, AMSE, Marseille, France.); Thierry Marchant (Department of data analysis, Ghent University, Belgium.) |
| Abstract: | The paper provides an axiomatic characterization of a family of rank dependent weighted average utility criteria applicable to decisions under ignorance or objective ambiguity. A decision under ignorance is described by the finite set of its final consequences while a decision under objective ambiguity is described by a finite set of probability distributions over a set of final consequences. The criteria characterized are those that assign to every element in a set a weight that depends upon the rank of this element if it was available for sure (or non-ambiguously) and that compare sets on the basis of their weighted utility for some utility function. A specific subfamily of these criteria that requires the weights to be proportional to each other is also characterized. |
| Keywords: | ignorance, ambiguity, ranking sets, axioms, ranks, weights, utility |
| JEL: | D80 D81 |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2223&r= |
| By: | Soren Blomquist; Anil Kumar; Che-Yuan Liang; Whitney K. Newey |
| Abstract: | This paper is about the nonparametric regression of a choice variable on a nonlinear budget set when there is general heterogeneity, i.e., in the random utility model (RUM). We show that utility maximization makes this a three-dimensional regression with piecewise linear, convex budget sets with a more parsimonious specification than previously derived. We show that the regression allows for measurement and/or optimization errors in the outcome variable. We characterize all of the restrictions of utility maximization on the budget set regression and show how to check these restrictions. We formulate nonlinear budget set effects that can be identified by this regression and give automatic debiased machine learners of these effects. We find that in practice nonconvexities in the budget set have little effect on these estimates. We use control variables to allow for endogeneity of budget sets and adjust for productivity growth in taxable income. We apply the results to estimate .52 as the elasticity of an overall tax rate change in Sweden. We also find that the restrictions of utility maximization are satisfied at the choices made by nearly all individuals in the data. |
| Keywords: | nonlinear budget sets; nonparametric estimation; heterogeneous preferences; taxable income; revealed stochastic preference |
| JEL: | C14 C24 H31 J22 |
| Date: | 2022–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:94867&r= |
| By: | Ruoxin Xiao |
| Abstract: | CRRA utility where the risk aversion coefficient is a constant is commonly seen in various economics models. But wealth-driven risk aversion rarely shows up in investor's investment problems. This paper mainly focus on numerical solutions to the optimal consumption-investment choices under wealth-driven aversion done by neural network. A jump-diffusion model is used to simulate the artificial data that is needed for the neural network training. The WDRA Model is set up for describing the investment problem and there are two parameters that require to be optimized, which are the investment rate of the wealth on the risky assets and the consumption during the investment time horizon. Under this model, neural network LSTM with one objective function is implemented and shows promising results. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2210.00950&r= |
| By: | Weidong Tian; Zimu Zhu |
| Abstract: | This paper considers an optimal consumption-investment problem for an investor whose instantaneous utility depends on consumption and wealth (as luxury goods or social status). The investor faces a general leverage constraint that the investment amount in the risky asset does not exceed an exogenous function of the wealth. We prove that the value function is second-order smooth, and the optimal consumption-investment policy are provided in a feedback form. Moreover, when the risky investment amount is bounded by a fixed constant, we show that under certain conditions, the leverage constraint is binding if and only if an endogenous threshold bounds the portfolio wealth. Our results encompass many well-developed portfolio choice models and imply new applications. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2210.01016&r= |
| By: | Maxim Bichuch; Zachary Feinstein |
| Abstract: | Within this work we consider an axiomatic framework for Automated Market Makers (AMMs). By imposing reasonable axioms on the underlying utility function, we are able to characterize the properties of the swap size of the assets and of the resulting pricing oracle. We have analyzed many existing AMMs and shown that the vast majority of them satisfy our axioms. We have also considered the question of fees and divergence loss. In doing so, we have proposed a new fee structure so as to make the AMM indifferent to transaction splitting. Finally, we have proposed a novel AMM that has nice analytical properties and provides a large range over which there is no divergence loss. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2210.01227&r= |
| By: | Daniel Reck; Arthur Seibold |
| Abstract: | Empirical evidence suggests that individuals often evaluate options relative to a reference point, especially seeking to avoid losses. In this paper, we provide the first welfare analysis under reference-dependent preferences. We decompose the welfare impact of changes in reference points and prices into direct and behavioral effects, and describe how these effects depend on whether reference dependence reflects a bias or a normative preference. In a simple model of loss aversion grounded in common empirical findings, we find that lowering reference points robustly improves welfare, while the welfare effect of a price change depends critically on normative judgments. We also derive sufficient statistics characterizations of the welfare effects of changing reference points and prices. We illustrate these theoretical findings with an empirical application to reference dependence exhibited in German workers’ retirement decisions. Both simulation and sufficient statistics results suggest positive welfare effects of increasing the Normal Retirement Age, but ambiguous effects of financial incentives to postpone retirement. Finally, we study how adopting alternative models of reference dependent preferences modifies key welfare effects. |
| Keywords: | reference-dependent preferences, loss aversion, welfare, pension reform |
| JEL: | D91 D60 H55 J26 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9999&r= |
| By: | Jibang Wu; Weiran Shen; Fei Fang; Haifeng Xu |
| Abstract: | Optimizing strategic decisions (a.k.a. computing equilibrium) is key to the success of many non-cooperative multi-agent applications. However, in many real-world situations, we may face the exact opposite of this game-theoretic problem -- instead of prescribing equilibrium of a given game, we may directly observe the agents' equilibrium behaviors but want to infer the underlying parameters of an unknown game. This research question, also known as inverse game theory, has been studied in multiple recent works in the context of Stackelberg games. Unfortunately, existing works exhibit quite negative results, showing statistical hardness and computational hardness, assuming follower's perfectly rational behaviors. Our work relaxes the perfect rationality agent assumption to the classic quantal response model, a more realistic behavior model of bounded rationality. Interestingly, we show that the smooth property brought by such bounded rationality model actually leads to provably more efficient learning of the follower utility parameters in general Stackelberg games. Systematic empirical experiments on synthesized games confirm our theoretical results and further suggest its robustness beyond the strict quantal response model. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2210.01380&r= |
| By: | Yoshihara, Naoki; Kwak, Se Ho |
| Abstract: | In contrast to Mandler’s (1999a; Theorem 6) generic determinacy of the steady-state equilibrium, we first show that any regular Sraffian steady-state equilibrium is indeterminate in terms of Sraffa (1960) under a simple overlapping generation economy with a fixed Leontief technique. We also check that this indeterminacy is generic. These results are obtained by explicitly introducing a simple model of every generation’s utility function and individual optimization program to the overlapping generation economy, which also explains the main source of the difference between our results and Mandler (1999a; section 6). We also argue the distinctiveness of our results in comparison with the standard literature, like Calvo (1978), of overlapping generations indeterminacy. |
| Keywords: | Sraffian indeterminacy, factor income distribution, general equilibrium framework |
| JEL: | B51 D33 D50 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hituec:734&r= |
| By: | Decerf,Benoit Marie A |
| Abstract: | This paper surveys the small branch of welfare economics that studies indicators combiningpoverty and mortality. The paper distinguishes two reasons for constructing such indicators. The first reason is toperform multidimensional well-being comparisons. For this purpose, mortality has (negative) intrinsic value. The keyquestion relates to the trade-off that the indicator makes between poverty and mortality, that is, between the qualityand quantity of life. A lifecycle utility approach suggests expressing this trade-off as the number of years spent inpoverty that is deemed equivalent to one year lost to mortality. The second reason is to investigate theinstrumental role that selective mortality—the fact that the poor tend to die earlier—has on the evolution of povertymeasures. Then, the key question is how to define the counterfactual situation against which the instrumentalimpact of mortality is assessed. |
| Date: | 2022–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:10042&r= |
| By: | Raymond, C.; Shvets, J. |
| Abstract: | We study the existence and relative importance of status concerns compared to financial incentives among managers in a large firm where the bonus is determined through a high powered tournament. Using detailed data about both performance and labour input decisions, we consider managers' response to feedback about their rank as well as monetary bonuses. We find that managers exhibit rank concerns that are distinct from, but co-exist with, financial performance incentives. These rank concerns are important: moving from the bottom to the top of the firm's ranking is worth up to $4,500 a year to the average manager, or 48% of their annual performance bonus. Moreover, managers exhibit desire to catch up (i.e., utility is concave in rank): when managers get a bad rank they respond by improving performance, rather than getting discouraged. Our data allow us to identify these effects using both outputs (performance) as well as inputs (staffing decisions) of the managers. |
| Keywords: | Status, Incentives, Relative performance, Intrinsic motivation |
| JEL: | D83 J22 J33 M12 M52 |
| Date: | 2022–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2256&r= |
| By: | HIBIKI Akira; SHINKUMA Takayoshi; YOSHIDA Jun |
| Abstract: | When autonomous driving vehicles, which are currently under development, become widespread in society, liability for accidents and the amount of damage caused will be attributed solely to vehicle performance. For this reason, there are two possible solutions to accidents: a damage liability rule and a product liability rule. Shavell (2020) focuses on the decision-making of automobile drivers under a damage liability rule and found that strict liability rules do not optimize car use and development of the technology for safety performance and thus in order to achieve the first best solution, he proposes a new liability rule (hereafter referred to as the Shavell rule) where parties bear their own damages and pay the government for the victim’s damage. This study extended his model to take into account the development of the technology for safety performance by firms. Our main findings are (1) when the utility function is the same across individuals, the safety performance that is developed under the Shavell rule would be excessive, and a vehicle purchase tax based on safety performance or a technology development tax should be introduced to discourage the excessive incentive to develop the technology, (2) in the case where fair premium damage insurance is available and the premium is determined based on automobile use, the same policy as is in (1) needs to be introduced, (3) when the utility function is different among individuals, the incentives to develop the technology may need to be strengthened by a vehicle purchase subsidy based on safety performance or a technology development subsidy in some cases, (4) Under a product liability rule, the vehicle-use tax and a technology development subsidy need to be implemented. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:eti:rdpsjp:22035&r= |
| By: | Ping Wang; Danyang Xie |
| Abstract: | To fill the knowledge gap that previous studies ignore either housing or internal urban structure and to enable better fit with important stylized facts, we construct a two-sector optimal growth model of housing where housing is produced by land and housing structure/household durables. We explicitly model within-city locational choice. Housing services derive positive utility but are decayed away from the city center. Our model enables a full characterization of the dynamic paths of housing and housing and land prices. The model is then calibrated to fit part of the stylized facts: faster growth of housing structure/household durables than housing, faster growth of land prices than housing prices, and downward housing price and land rent gradients within a city. The calibrated model can then be used to predict the remaining untargeted part of stylized facts: a locationally steeper land rent gradient than the housing price gradient, relatively flatter housing quantity and price gradients in larger cities with flatter population gradients and moderate rise in the housing expenditure share. The calibrated model can be further used to yield additional insights on housing dynamics and spatial distribution. We find nonhomotheticities in housing preference and housing production are crucial for realistic model predictions. |
| JEL: | E20 O41 R13 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30516&r= |
| By: | Conte,Bruno; Ianchovichina,Elena |
| Abstract: | Using fine-grained spatial data and a dynamic spatial general equilibrium model, this paperassesses the magnitude of mobility frictions in Latin America as well as the effects of their reduction on spatialdevelopment in the region. The results suggest that in most Latin American countries, migration frictions calibratedbased on spatially differentiated initial utility are on average smaller and less dispersed than those obtainedassuming uniform within-country initial utility. A reduction in trade costs due to optimal investments in roadinfrastructure in most Latin American countries increases the present discounted value of real per capita income onaverage in the region by 15.1 percent. This effect is larger than the effects obtained with static quantitative trademodels because of substantial dynamic gains. By contrast, a reduction in migration entry costs in the most productiveand more populous locations in the Latin American countries has a negligible effect on the present discounted value ofthe region’s real per capita income, reflecting the relatively small dispersion in domestic migration frictionsand their relatively low levels in top locations. In both counterfactuals, the welfare increases are significantlylarger than the increases in real per capita output because the reductions in mobility frictions allow people torelocate to areas with better amenities and therefore derive higher utility. These results suggest that trade costs, notmigration barriers, represent a major constraint to theefficient spatial distribution of economic activity and growth in Latin America. |
| Date: | 2022–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:10071&r= |
| By: | Dirk Krueger; Harald Uhlig |
| Abstract: | This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which households can insure against idiosyncratic income risk through long-term insurance contracts. Insurance companies operating in perfectly competitive markets can commit to future contractual obligations, whereas households cannot. For the case in which household labor productivity takes two values, one of which is zero, and where households have log-utility we provide a complete analytical characterization of the optimal consumption insurance contract, the stationary consumption distribution and the equilibrium aggregate capital stock and interest rate. Under parameter restrictions, there is a unique stationary equilibrium with partial consumption insurance and a stationary consumption distribution that takes a truncated Pareto form. The unique equilibrium interest rate (capital stock) is strictly decreasing (increasing) in income risk. The paper provides an analytically tractable alternative to the standard incomplete markets general equilibrium model developed in Aiyagari (1994) by retaining its physical structure, but substituting the assumed incomplete asset markets structure with one in which limits to consumption insurance emerge endogenously, as in Krueger and Uhlig (2006). |
| JEL: | E10 E21 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30518&r= |
| By: | Leroux, Marie-Louise (Université catholique de Louvain, LIDAM/CORE, Belgium); Pestieau, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium); Ponthiere, Gregory (Université catholique de Louvain) |
| Abstract: | This paper studies the optimal design of assisted reproductive technologies (ART) policies in an economy where individuals differ in their reproductive capacity (or fecundity) and in their wage. We find that the optimal ART policy varies with the postulated social welfare criterion. Utilitarianism redistributes only between individuals with unequal fecundity and wages but not between parents and childless individuals. To the opposite, ex post egalitarianism (which gives absolute priority to the worst-off in realized terms) redistributes from individuals with children toward those without children, and from individuals with high fecundity toward those with low fecundity, so as to compensate for both the monetary cost of ART and for the disutility from involuntary childlessness resulting from unsuccessful ART investments. Under asymmetric information and in order to solve for the incentive problem, utilitarianism recommends also to either tax or subsidize ART investments of low-fecundity-lowproductivity individuals depending on the degree of complementarity between fecundity and ART in the fertility technology. On the opposite, ex post egalitarianism always recommends marginal taxation. |
| Keywords: | Fertility ; assisted reproductive technologies ; non-linear taxation ; utilitarianism ; ex-post egalitarianism |
| JEL: | H31 H51 I14 I18 J13 |
| Date: | 2022–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2022022&r= |
| By: | Luofeng Liao; Yuan Gao; Christian Kroer |
| Abstract: | Statistical inference under market equilibrium effects has attracted increasing attention recently. In this paper we focus on the specific case of linear Fisher markets. They have been widely use in fair resource allocation of food/blood donations and budget management in large-scale Internet ad auctions. In resource allocation, it is crucial to quantify the variability of the resource received by the agents (such as blood banks and food banks) in addition to fairness and efficiency properties of the systems. For ad auction markets, it is important to establish statistical properties of the platform's revenues in addition to their expected values. To this end, we propose a statistical framework based on the concept of infinite-dimensional Fisher markets. In our framework, we observe a market formed by a finite number of items sampled from an underlying distribution (the "observed market") and aim to infer several important equilibrium quantities of the underlying long-run market. These equilibrium quantities include individual utilities, social welfare, and pacing multipliers. Through the lens of sample average approximation (SSA), we derive a collection of statistical results and show that the observed market provides useful statistical information of the long-run market. In other words, the equilibrium quantities of the observed market converge to the true ones of the long-run market with strong statistical guarantees. These include consistency, finite sample bounds, asymptotics, and confidence. As an extension, we discuss revenue inference in quasilinear Fisher markets. |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2209.15422&r= |
| By: | Roland Bénabou (Princeton University); Armin Falk (Institute on Behavior and Inequality (briq) and University of Bonn); Luca Henkel (University of Bonn); Jean Tirole (University of Toulouse Capitole) |
| Abstract: | We study the extent to which a person’s moral preferences can be inferred from their choices, and how behaviors that appear deontologically motivated should be interpreted. Comparing direct elicitation (DE) and multiple-price list (MPL) mechanisms, we characterize how image motives inflate the extent of prosocial behavior. The resulting signalling bias is shown to depend on the interaction between elicitation method and visibility level: it is greater under DE for low reputation concerns, and greater under MPL for high ones. We test the model’s predictions in an experiment with life-saving donations and find the key crossing effect predicted by the theory. |
| Keywords: | Moral behavior, deontology, utilitarianism, consequentialism, social image, self-image, norms, preference elicitation, multiple price list, experiments |
| JEL: | C91 D01 D62 D64 D78 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:pri:econom:2022-26&r= |
| By: | Jack,B. Kelsey; McDermott,Kathryn; Sautmann,Anja |
| Abstract: | Multiple price lists are a convenient tool to elicit willingness to pay in surveys andexperiments, but choice patterns such as “multiple switching” and “never switching” indicate high error rates.Existing measurement approaches often do not provide accurate standard errors and cannot correct for bias due toframing and order effects. This paper proposes to combine a randomization approach with a random-effects latent utilitymodel to detect bias and account for error. Data from a choice experiment in South Africa shows that significantorder effects exist which, if uncorrected, would lead to distorted conclusions about subjects’ preferences. Templatesare provided to create a multiple price list survey instrument in SurveyCTO and analyze the resulting data usingthe proposed methods. |
| Date: | 2022–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:10173&r= |
| By: | Iania, Leonardo (Université catholique de Louvain, LIDAM/LFIN, Belgium); Tretiakov, Pavel (Université catholique de Louvain, LIDAM/LFIN, Belgium); Wouters, Rafael (National Bank of Belgium) |
| Abstract: | We study the role of the cost of inflation channel in determining the risk premium in a (nonlinear) New Keynesian DSGE model. Relying on a Calvo (or Rotemberg) price setting, we show that while the cost of inflation channel generates the desired term premium moments, it suffers from nontrivial, counterintuitive approximation errors in the price dispersion function. In addition to documenting the issues, we propose ways to alleviate them, including a quasikinked demand function as a risk-generating mechanism. |
| Date: | 2022–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:ajf:louvlf:2022008&r= |