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on Utility Models and Prospect Theory |
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Issue of 2024‒03‒25
23 papers chosen by |
| By: | Mononen, Lasse (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | Experimental evidence on intertemporal choice has documented a preference for consumption smoothing that cannot be explained by discounted utility. We study a general class of dynamically consistent intertemporal dual-self preferences that accommodate a preference for consumption smoothing. We show that these general preferences have a simple and tractable structure. They are characterized by a gain-loss asymmetry where gains with respect to future utility are discounted differently than losses. As applications, first, we show that under the stationarity axiom, these preferences are convex or concave. Second, we show that dynamically consistent intertemporal Choquet expected utility coincides with discounted expected utility. |
| Date: | 2024–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:686&r=upt |
| By: | Mononen, Lasse (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | Dynamic consistency is crucial for credible evaluation of intergenerational choice plans that inherently lack commitment. We offer a general characterization for dynamically consistent intergenerational welfare aggregation. The aggregation is characterized by envy-guilt asymmetry in discounting with respect to future generations’ utility: Higher utility than future generations’ utility is discounted differently than lower utility than future generations’ utility. This offers a simple and tractable characterization for the dynamically consistent choice rules. |
| Keywords: | Dynamic consistency, discounting, social discount factor, preference aggregation |
| Date: | 2024–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:687&r=upt |
| By: | Alfred Galichon; Simon Weber |
| Abstract: | In this paper, we examine matching models with imperfectly transferable utility (ITU). We provide motivating examples, discuss the theoretical foundations of ITU matching models and present methods for estimating them. We also explore connected topics and provide an overview of the related literature. This paper has been submitted as a draft chapter for the Handbook of the Economics of Matching, edited by Che, Chiappori and Salani\'e. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.05222&r=upt |
| By: | Antonio Filippin; Marco Mantovani |
| Abstract: | Using a choice experiment we analyze moral preferences over fatalities and jobs losses due to the pandemic in Italy, the UK and the US. A structural estimation displays, surprisingly, aversion to diversification among these two bads. We also find that about 95% of the weight in the participants’ utility function goes to health, and that respondents’ stable traits (such as political orientation or risk aversion) influence attitudes more than their personal experiences with the consequences of the pandemic. Moreover, policy responses look misaligned with estimated preferences. Italy adopted more stringent containment measures, while Italian respondents display a relatively weaker pro-health attitude. |
| Keywords: | Covid-19, Structural estimation, Health-wealth trade-off, Moral preferences. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:531&r=upt |
| By: | Burkhard C. Schipper (Department of Economics, University of California Davis) |
| Abstract: | We consider a decision maker who is unaware of objects to be sampled and thus cannot form beliefs about the occurrence of particular objects. Ex ante she can form beliefs about the occurrence of novelty and the frequencies of yet to be known objects. Conditional on any sampled objects, she can also form beliefs about the next object being novel or being one of the previously sampled objects. We characterize behaviorally such beliefs under subjective expected utility. In doing so, we relate "reverse" Bayesianism, a central property in the literature on decision making under growing awareness, with exchangeable random partitions, the central property in the literature on the discovery of species problem and mutations in statistics, combinatorial probability theory, and population genetics. Partition exchangeable beliefs do not necessarily satisfy "reverse" Bayesianism. Yet, the most prominent models of exchangeable random partitions, the model by De Morgan (1838), the one parameter model of Ewens (1972), and the two parameter model of Pitman (1995) and Zabell (1997), do satisfy "reverse" Bayesianism. |
| Keywords: | Awareness of unawareness, unknown unknowns, exchangeable random partitions, "reverse" Bayesianism, discovery of species problem, discovery, novelty, inductive reasoning |
| JEL: | D83 |
| Date: | 2024–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:cda:wpaper:362&r=upt |
| By: | Krecik, Markus |
| Abstract: | Current time allocation and household production models face three major weaknesses: First, they only describe the average time allocation. Thus, information about the order of activities is lost. Therefore, it is impossible to describe the influence of activities on later ones. Such interactions are likely pervasive, and can significantly alter behavior. Second, they are unable to describe the effort allocation of individuals, although effort influences one's time allocation. Thereby, they are either unable or very limited in describing labor productivity or multitasking although individuals frequently multitask. Through the omission of interactions and effort allocation, current models yield biased descriptions of e.g. price and time elasticities. Third, they require strong assumptions, such as perfect foresight or periodic environments, and thus cannot describe behavior in unpredictable environments, like reactions to external shocks. In this paper, I provide a remedy for these shortcomings by developing a dynamical model of procedurally rational decision making. The basic idea of the model is a feedback loop between experienced utility, decision utility, and activities. In applications of the model, I show how introducing a work-leisure interaction and multitasking significantly changes elasticities and how nonmarginal external shocks cause short-term demand surges, none of which can be described by current time allocation models. |
| Keywords: | Preferences, Decision-Making, Behavioral Economics, Procedural Rationality, Household Economics |
| JEL: | C61 C63 D11 D90 J22 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:284389&r=upt |
| By: | Federico Echenique; Joseph Root; Fedor Sandomirskiy |
| Abstract: | We study matching markets with aligned preferences and establish a connection between common design objectives -- stability, efficiency, and fairness -- and the theory of optimal transport. Optimal transport gives new insights into the structural properties of matchings obtained from pursuing these objectives, and into the trade-offs between different objectives. Matching markets with aligned preferences provide a tractable stylized model capturing supply-demand imbalances in a range of settings such as partnership formation, school choice, organ donor exchange, and markets with transferable utility where bargaining over transfers happens after a match is formed. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.13378&r=upt |
| By: | Jihyeok Jung; Chan-Oi Song; Deok-Joo Lee; Kiho Yoon |
| Abstract: | This study introduces an optimal mechanism in a dynamic stochastic knapsack environment. The model features a single seller who has a fixed quantity of a perfectly divisible item. Impatient buyers with a piece-wise linear utility function arrive randomly and they report the two-dimensional private information: marginal value and demanded quantity. We derive a revenue-maximizing dynamic mechanism in a finite discrete time framework that satisfies incentive compatibility, individual rationality, and feasibility conditions. It is achieved by characterizing buyers' utility and deriving the Bellman equation. Moreover, we propose the essential penalty scheme for incentive compatibility, as well as the allocation and payment policies. Lastly, we propose algorithms to approximate the optimal policy, based on the Monte Carlo simulation-based regression method and reinforcement learning. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.14269&r=upt |
| By: | Marco Mantovani; Antonio Filippin |
| Abstract: | In prediction markets prices can be interpreted as the average belief of the traders under restrictive theoretical assumptions, namely specific risk preferences (e.g., log utility) and the prior information equilibrium. Prior information equilibrium is more likely to hold in a call auction, but prediction markets are usually implemented in double auctions that are known to better aggregate information. In this paper we present a laboratory experiment meant to shed some light on this tension, assessing the influence of the main elements that should affect the equilibrium price also manipulating the market institution. We do not find that risk preferences and incorrect beliefs play a significant role in our data. We find instead that in the double auction– where at least partial information aggregation through belief revisions should be expected – prices are closer to the average belief than in the call auction – where, instead, belief aggregation should be expected. We also find evidence that beliefs are updated in the direction of observed prices, rather than of the true state. |
| Keywords: | Prediction markets, Information aggregation, Laboratory experiment, Risk preferences, Beliefs |
| JEL: | D81 C92 D40 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:532&r=upt |
| By: | SHINOZAKI, Hiroki |
| Abstract: | We consider the object allocation problem with money. The seller owns multiple units of an object, and is only interested in her revenue from an allocation. Each buyer receives at most one unit of the object, and has a quasi-linear utility function with private valuations. We study incentives of the seller to increase her revenue by introducing false-name buyers, i.e., shill bidding. An (allocation) rule is shill-proof if the seller never benefits from introducing false-name buyers. A rule is a binary posted prices rule if there is a profile of posted prices such that whenever a buyer receives the object, she pays either her posted price or zero, and her payment is equal to zero when she does not receive the object. We show that if a rule satisfies shillproofness, strategy-proofness, and non-imposition, then it is a binary posted prices rule. This result shows that the cost of preventing the seller from shill bidding is equivalent to the rigidity of the payment of each buyer, which highlights the difficulty in preventing the seller from shill bidding. It extends to a model of non-quasi-linear utility functions with interdependent valuations. |
| Keywords: | Shill-proofness, Shill bidding, Strategy-proofness, Posted prices rule, Binary posted prices rule, Multi-unit auctions |
| JEL: | D44 D47 D71 D82 |
| Date: | 2024–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-137&r=upt |
| By: | Elena Capatina; Gary Hansen; Minchung Hsu |
| Abstract: | This paper compares the impact of long term care (LTC) risk on single and married households and studies the roles played by informal care (IC), consumption sharing within households, and Medicaid in insuring this risk. We develop a life-cycle model where individuals face survival and health risk, including the possibility of becoming highly disabled and needing LTC. Households are heterogeneous in various important dimensions including education, productivity, and the age difference between spouses. Health evolves stochastically. Agents make consumption-savings decisions in a framework featuring an LTC state-dependent utility function. We find that household expenditures increase significantly when LTC becomes necessary, but married individuals are well insured against LTC risk due to IC. However, they still hold considerable assets due to the concern for the spouse who might become a widow/widower and can expect much higher LTC costs. IC significantly reduces precautionary savings for middle and high income groups, but interestingly, it encourages asset accumulation among low income groups because it reduces the probability of means-tested Medicaid LTC. |
| JEL: | D16 E21 H31 J14 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32196&r=upt |
| By: | ABE, Naohito; Rao, D.S. Prasada |
| Abstract: | There is growing interest in measuring inflation in the presence of time-varying preferences. To make price comparisons under changing preferences, a number of studies are imposing normalization conditions on preference parameters, assuming cardinal utility functions. The resulting price indexes depend on the choice of normalization condition imposed, necessitating a careful specification of this condition. Carluccio et al. (2023) adopt a normalization where the arithmetic mean of the time-varying taste parameters remains constant, whereas Hottman et al. (2016) and Redding and Weinstein (2020) maintain a constant geometric mean. In this paper we invoke the commensurability axiom which requires the price index to be independent of units of measurement. We prove that a necessary and sufficient condition on the normalization condition that ensures commensuarability is the geometric mean-based normalization. Consequently, adopting an arithmetic meanbased normalization condition results in index values that depend on arbitrarily chosen measurement units, such as gallons or 100 milliliters. |
| Keywords: | Cost of Living, Price Index, Preference Heterogeneity, Characterization |
| JEL: | E31 C43 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:hit:rcesrs:dp24-1&r=upt |
| By: | Ata Atay (Department of Mathematical Economics, Finance and Actuarial Sciences, and Barcelona Economic Analysis Team (BEAT), University of Barcelona, Spain); Christian Trudeau (Department of Economics, University of Windsor) |
| Abstract: | Cooperative game theory aims to study how to divide a joint value created by a set of players. These games are often studied through the characteristic function form with transferable utility, which represents the value obtainable by each coalition. In the presence of externalities, there are many ways to define this value. Various models that account for different levels of player cooperation and the influence of external players on coalition value have been studied. Although there are different approaches, typically, the optimistic and pessimistic approaches provide sufficient insights into strategic interactions. This paper clarifies the interpretation of these approaches by providing a unified framework. We show that making sure that no coalition receives more than their (optimistic) upper bounds is always at least as difficult as guaranteeing their (pessimistic) lower bounds. We also show that if externalities are negative, providing these guarantees is always feasible. Then, we explore applications and show how our findings can be applied to derive results from the existing literature. |
| Keywords: | Cooperative games, optimization problems, cost sharing, core, anti-core, externalities. |
| JEL: | C44 C71 D61 D62 D63 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:wis:wpaper:2401&r=upt |
| By: | Enriqueta Aragonès |
| Abstract: | This paper analizes the discrimination that individuals face at work due to their commitment to unpaid care work. The formal model presents a parametrization of the discrimination that affects the individual’s optimal labor market participation. The welfare of individuals with commitment to family duties is reduced for two different reasons: for not being able to participate as much in the labor market and thus receive a lower labor income, and for not being able to contribute as much to their family commitments. We compare the results for the female and male sections of the society and we illustrate the observed gender gaps in terms of labor market participation, income levels, and overall utility obtained. We find that even though the gender wage gap may be alleviated with reductions of the cost associated to unpaid care work, the gender utility gap will persist. |
| Keywords: | discrimination, labor market, unpaid care work |
| JEL: | J7 J31 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1429&r=upt |
| By: | SHINOZAKI, Hiroki |
| Abstract: | We study the problem of allocating heterogeneous objects to agents with money. Each agent can receive several objects and has a quasi-linear utility function. The owner of the objects is only interested in his revenue from an allocation. An (allocation) rule is shutting-out-proof if no group of agents together with the owner ever benefits from shutting out other groups of agents and arranging payments among themselves. We show that on any domain that includes all the additive valuation functions, a Vickrey rule satisfies shutting-out-proofness if and only if all the valuation functions in the domain satisfy the substitutes condition (Kelso and Crawford, 1982). Our result sheds a new light on the relationship between the desirable properties of a Vickrey rule and the substitutes condition (Ausubel and Milgrom, 2002; Milgrom, 2004). |
| Keywords: | Shutting-out-proofness, Collusion, Vickrey rules, Substitutes condition, Combinatorial auctions |
| JEL: | D44 D47 D71 D82 |
| Date: | 2024–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-138&r=upt |
| By: | Sylvain Béal (Université de Franche-Comté, CRESE, UR3190, F-25000 Besançon, France); Mostapha Diss (Université de Franche-Comté, CRESE, UR3190, F-25000 Besançon, France); Rodrigue Tido Takeng (Université de Caen, CREM, UMR6211, F-14000 Caen, France) |
| Abstract: | The Shapley and Owen values defined respectively for cooperative games with transferable utility (TU-games), and TU-games with coalition structure have recently been extended as allocation rules for TU-games with diversity constraints. This new class of games is introduced by B ́eal et al. (Working paper, 2024). In this new environment, players are divided into disjointed groups called communities. Diversity constraints require a mini- mum number of members in each community for cooperation to take place. A coalition is diverse if it contains at least the required number of members from each community. The diversity-restricted game is a TU-game which assigns zero to any non-diverse coali- tion and also assigns the original worth of a coalition if it is diverse. The extensions of the Shapley and Owen values are respectively called the Diversity Shapley value which is defined as the Shapley value of the diversity-restricted game, and the Diversity Owen value which is defined as the Owen value of the diversity-restricted game with coalition structure. Moreover, two axiomatic characterizations of these values are given. In this paper, we also present two new axiomatic characterizations of the Diversity Owen and Shapley values. |
| Keywords: | TU-games, diversity constraints, axiomatic characterization, Diversity Shap- ley value, Diversity Owen value. |
| JEL: | C71 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:crb:wpaper:2024-09&r=upt |
| By: | S. Pridiksha (Corresponding Author, Madras School of Economics (MSE), Chennai); T. Archana (MSE) |
| Abstract: | In the late 19th century, with growing criticism of the classical school of economics of ignorance of microeconomics, Leon Walras, one of the pioneers of the 1871 Marginalist Revolution, founded the Lausanne school of economics (Ecole de Lausanne). With an emphasis on mathematics, this school attributes all economic activity to the choices and actions of individuals. The central feature of the school is the concise formal description of ideas with mathematical notation which was lacking in classical economy. Lausanne school economists such as Leon Walras, Vilfredo Pareto, and others formulated and improved principles and theories such as general equilibrium theory, Pareto optimality, the 80-20 rule, the circulation of elites, ordinal utility and so on. The paper critically examines these ideas and their evolution. This paper explains the general equilibrium theory developed by Walras, breaking through the misconceptions revolving around unrealistic assumptions. With the focus on welfare economics, the principles of Pareto of Lausanne school had profoundly impacted public policy, the highlights and challenges of this impact is analysed. The aim of reviving Walras’s ideas from enigma led to further development in economics by Irving Fischer, Cassel, Wicksell. Paretian “taste and obstacles” approach was also advanced by Slutsky and W.E.Johnson. The abandonment of walras’s theories is the crucial cause of contemporary financial crisis , thus, Lausanne tradition is alive, kicking and highly relevant in the contemporary world. |
| Keywords: | Economic thought, Neoclassical, Leon Walras, Vilfredo Pareto, Wicksell, Cassel |
| JEL: | B3 B31 B16 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:mad:wpaper:2023-249&r=upt |
| By: | Shawn Berry |
| Abstract: | Price perception by consumers represents a challenge to the ability of a business to correctly and profitably price and sell their products or services in a given market and any new target market. Complicating the perception of prices is the dynamics of price and income elasticity and the heterogeneity of consumer preferences. This article proposes a novel metric that conceptualizes elasticity as a means of generally quantifying the potential for price perception problems in a market using an elegant and non-utility based identity. The results suggest that given known price and income elasticity values, a business can anticipate pricing perception problems in advance and address the potential for the damaging distortion of their value proposition. Further, the business can use this insight to correctly choose a strategic pricing approach.. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.05152&r=upt |
| By: | Mayuri Chaturvedi |
| Abstract: | In this paper, I explore the effect of older males’ and females’ education on younger cohorts’ education in the United States. I use US Census and ACS data from 1940-2016 and exploit the differences in schooling levels among different ethnicities as a source of variation in the pool of skills among potential partners. I find that older men’s education correlates more strongly compared to older women’s with females in younger cohorts. I develop a model of pre-marital investments in education to explain the above results. Agents derive utility from labor market returns and marriage market returns to education. Due to society’s preference that women marry up, the model proposes that women experience lower utility from getting ‘too much’ education because of a lower probability of finding a preferred partner. When there are more high-education men around, women respond by increasing their education because of a loosening of their constraint. The model also predicts that high-skill women will be less affected by the change in men’s education than low-skill women. |
| Keywords: | gender norms, education, marriage norms, culture, inequality, ethnicity, hypergamy |
| JEL: | I2 I23 I24 I26 I29 J16 J24 Z1 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:liv:livedp:202216&r=upt |
| By: | Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Jiri Woschitz (BI Norwegian Business School) |
| Abstract: | Central bank money provides utility by serving as means of exchange for virtually all transactions in the economy. Central banks issue reserves (money) to banks in exchange for assets such as government bonds. If additional reserves have value to a bank, an asset’s degree of convertibility into reserves can affect its price. We show the existence of a government bond reserves convertibility premium, which tapers off at longer maturities. The degree of convertibility is priced, but heterogeneously so. Our findings have implications for our understanding of reserves, liquidity premia, the term structure of interest rates, and central bank collateral policy. |
| Keywords: | central bank, reserves, convertibility premium, liquidity premium, term structure, yield curve, collateral policy, haircut |
| JEL: | G12 E43 E58 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2417&r=upt |
| By: | Yuanying Guan; Muqiao Huang; Ruodu Wang |
| Abstract: | We provide a new characterization of second-order stochastic dominance, also known as increasing concave order. The result has an intuitive interpretation that adding a risk with negative expected value in adverse scenarios makes the resulting position generally less desirable for risk-averse agents. A similar characterization is also found for convex order and increasing convex order. The proofs techniques for the main result are based on properties of Expected Shortfall, a family of risk measures that is popular in financial regulation. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.13355&r=upt |
| By: | Jef Boeckx (Economics and Research Department, National Bank of Belgium); Leonardo Iania (, Université catholique de Louvain, LFIN/CORE); Joris Wauters (Economics and Research Department, National Bank of Belgium) |
| Abstract: | We propose a new model to decompose inflation swaps into genuine inflation expectations and risk premiums. We develop a no-arbitrage term structure model with stochastic endpoints, separating macroeconomic variables into transitory parts and long-run, economically grounded determinants, such as the equilibrium real interest rate and the inflation target. Our estimations deliver new insights into how macroeconomic variables affect market-based inflation expectation measures |
| Keywords: | Inflation-linked swaps, affine term structure model, inflation expectations, inflation risk premia, inflation trend, shifting endpoints |
| JEL: | E31 E44 E52 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:202402-446&r=upt |
| By: | Akay, Alpaslan; Bargain, Olivier; Jara Tamayo, H. Xavier |
| Abstract: | Subjective well-being (SWB) data are increasingly used to perform welfare analysis. Interpreted as “experienced utility”, it has recently been compared to “decision utility” using small-scale experiments most often based on stated preferences. We transpose this comparison to the framework of non-experimental and large-scale data commonly used for policy analysis, focusing on the income–leisure domain where redistributive policies operate. Using the British Household Panel Survey, we suggest a “deviation” measure, which is simply the difference between actual working hours and SWB-maximizing hours. We show that about three-quarters of individuals make decisions that are not inconsistent with maximizing their SWB. We discuss the potential channels that explain the lack of optimization when deviations are significantly large. We find proxies for a number of individual and external constraints, and show that constraints alone can explain more than half of the deviations. In our context, deviations partly reflect the inability of the revealed preference approach to account for labor market rigidities, so the actual and SWB-maximizing hours should be used in a complementary manner. The suggested approach based on our deviation metric could help identify labor market frictions. |
| Keywords: | decision utility; experienced utility; labor supply; subjective well-being |
| JEL: | C90 I31 J22 |
| Date: | 2023–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:117746&r=upt |