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on Utility Models and Prospect Theory |
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Issue of 2022‒11‒07
eight papers chosen by |
| By: | Keigo Inukai; Yuta Shimodaira; Kohei Shiozawa |
| Abstract: | The constant elasticity of substitution (CES) function is widely used to model distributional preferences in modified dictator games. However, it has been pointed out that its parameter interpretations are inconsistent and problematic in applications. We constructed a model to address this issue by combining two formulations of the CES function. We demonstrated that the proposed model provides consistent interpretations of parameters. Our results clarified that the conventional interpretations of the standard CES function parameters for describing distributional preferences are inappropriate. Notably, “the equality–efficiency trade-off,” a conventional interpretation of the substitution parameter, is unrelated to observed individual behaviors. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1195&r= |
| By: | Patrice Loisel; Marielle Brunette; Stéphane Couture |
| Abstract: | Storm is a major risk in forestry. However, due to the more or less pessimistic scenarios of future climate change, storm frequency is now ambiguous and only partially known (i.e., scenario ambiguity). Furthermore, within each scenario, the quantification of storm frequency is also ambiguous due to the differences in risk quantification by experts, creating a second level of ambiguity (i.e., frequency ambiguity). In such an ambiguous context, knowledge of the future climate through accurate information about this risk is fundamental and can be of significant value. In this paper, we question how ambiguity and ambiguity aversion affect forest management, in particular, optimal cutting age. Using a classical Faustmann framework of forest rotation decisions, we compare three different situations: risk, scenario ambiguity and frequency ambiguity. We show that risk and risk aversion significantly reduce the optimal cutting age. We also show that both scenario and frequency ambiguities reinforce the effect of risk. Inversely, ambiguity aversion has no effect. The value of information that resolves scenario ambiguity is high, whereas it is null for frequency ambiguity. |
| Keywords: | Rotation decision, Risk, Ambiguity, Ambiguity Aversion, Risk Aversion, Value of Information, Forests, Faustmann criterion. |
| JEL: | D81 D90 Q23 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2022-26&r= |
| By: | Stennek, Johan (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | Rayo and Becker (2007) model happiness as an imperfect measurement tool: It provides a partial ordering of alternative courses of actions. In this note, decisionmakers use their inability to rank two actions, to infer rankings of other pairs of actions. It is demonstrated that coarser happiness information actually increases the power of inference. As a result behavior is maximizing, not merely satisficing, almost independent of how coarse the happiness information is. Moreover, to support inference, evolution selects a happiness function with different properties than the one maximizing direct sensory information. |
| Keywords: | Indirect evolutionary approach; utility function |
| JEL: | B52 D91 I31 |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0829&r= |
| By: | Guillermo Santos (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | This paper investigates optimal fiscal and monetary policy in a New-Keynesian model with preferences over safe assets (POSA). Relative to a model with standard preferences, a Ramsey planner facing POSA uses inflation more actively to absorb the effects of fiscal and demand shocks despite inflation being costly. The optimal response of inflation to the shocks thus departs from the traditional prescription observed in standard New-keynesian models with sticky prices in which inflation volatility is near zero. Moreover, under POSA taxes are not as smooth as under standard preferences and are more frontloaded, an outcome that brings the model closer to optimal policy under flexible prices. With POSA, debt issuance depresses the liquidity premium, reducing revenues collected by the government and tightening the budget constraint. Therefore the planner is much less willing to issue debt in response to (say) a fiscal shock, which explains the excess tax volatility observed. These results do not dramatically change when private capital is introduced to the economy, the planner stills finds optimal to use inflation to absorb the shocks. Moreover in spite of the fact that debt issuance is lower private investment is still crowded out under POSA due to the higher distortionary taxes. Finally, the planner faced with POSA outperforms the New-Keynesian planner (with standard preferences) in terms of stabilizing the economy to a negative demand disturbance, but underperforms in terms of managing the government spending shock. The negative demand shock increases the demand for government debt and relaxes the tradeoff facing the planner. The opposite holds in the case of a spending shock. |
| Keywords: | optimal fiscal and monetary policy, bonds in the utility function, distortionary taxes, liquidity premium |
| JEL: | E31 E52 E62 H21 |
| Date: | 2022–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2022021&r= |
| By: | Geir B Asheim (UiO - University of Oslo); Kohei Kamaga (Sophia University [Tokyo]); Stéphane Zuber (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Keywords: | utilitarianism,intergenerational equity,population ethics |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03760324&r= |
| By: | Pierre Januard (PHARE - Philosophie, Histoire et Analyse des Représentations Économiques - UP1 - Université Paris 1 Panthéon-Sorbonne) |
| Abstract: | The Latin terms commonly used to signify 'risk' are absent from Thomas Aquinas's economic writings. Instead, Aquinas offers a lexicon of probability, prudence and danger. This ternary lexicon brings with it a triple universalisation of risk: first, a universalisation through activity, including the activity of analysis considered as part of economic activity; second, a universalisation through the agents, since everyone-the observer, the co-contractors, the prince and the population-is affected by the risk; and, finally, a partial universalisation of its definition, since the lexicon indicates a risk which is not yet restricted by calculation, as the modern notion is, although some distinctions are already made by Aquinas. However, the lexicon only describes a risk of loss and does not take into account chance of gain. |
| Keywords: | Thomas Aquinas,scholastics,danger,probability,prudence,risk |
| Date: | 2022–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03787210&r= |
| By: | Mariia Kosar; Sergei Mikhalishchev |
| Abstract: | This paper studies the information choice of exchange-traded funds (ETF) investors, and its impact on the price efficiency of underlying stocks. First, we show that the learning of stock-specific information can occur at the ETF level. Our results suggest that ETF investors respond endogenously to changes in the fundamental value of underlying stocks, in line with the rational inattention theory. Second, we provide evidence that ETFs facilitate propagation of idiosyncratic shocks across its constituents. |
| Keywords: | Exchange-Traded Fund; ETF; Price Efficiency; Rational Inattention; Information Acquisition; Comovement; |
| JEL: | G12 G14 D82 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp735&r= |
| By: | Mughal, Adil Ahmad |
| Abstract: | Aside from the calculating and always troublesome utilitarian ethic, a moral theory of value can better serve as a desirable form of the veil of ignorance analogy on the part of the arbitration of allocation procedures. Philosopher Soren Kierkegaard suggested a 'moral absolute' that achieves a 'teleological suspension of the ethical'. This suspension or the veil of ignorance can be formulated as a randomization of allocation procedures across agents in a given preference space; such that, a truly self-interested gain is unpriced and therefore a true gift, that is, a gift without an obligation. |
| Keywords: | Moral value, self-interest, the gift, invariance of domain, social preferences, unpriced preferences |
| JEL: | B4 C0 C70 C78 C9 D6 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:114825&r= |