|
on Utility Models and Prospect Theory |
|
Issue of 2024‒08‒26
eleven papers chosen by |
| By: | Miller, Anne |
| Abstract: | The introduction of the concept of separate needs into cardinal utility theory requires two propositions. The first specifies that the shape of a utility function for a commodity (good, service or event) fulfilling a need should reflect the experiences of an individual as the commodity fulfils that need: deprivation, subsistence, sufficiency, finite satiation with the possibility of a surfeit, or satiation at infinity, referred to as a ‘leaning-S-shaped’ utility. The second is a separability rule, specifying weak separability for choices within the same need, and strong (additive) separability for those between different needs. This paper creates a utility function for two goods fulfilling two different needs, from which the functional form for a demand equation is derived. The indifference curve map and demand and Engels curve diagrams are interpreted, and their outcomes inferred. The main outcomes are: A straight-line indifference curve, BA, defined by relative-intensities-of-need, separates the concave- from the convex-to-the-origin indifference curves, and can be identified as an absolute poverty line. It leads to disequilibrium in the derived functional form diagrams. Concave-to-the-origin indifference curves represent dysfunctional poverty. The convex-to-the-origin indifference curves can be divided into four areas. Where the individual experiences a greater sufficiency in one need combined with a modest deprivation in another, s/he will respond to changes as an inferior, or even Giffen, good. Their boundaries are reflected in envelope curves in the derived functional form diagrams. Three types of experience can be identified: dysfunctional poverty, functional poverty and sufficiency. |
| Keywords: | increasing marginal utility, additive utilities, absolute poverty line, disequilibrium, dysfunctional poverty, deprivation, subsistence, Giffen good. |
| JEL: | C21 D11 |
| Date: | 2024–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121455 |
| By: | Anujit Chakraborty; Luca Henkel |
| Abstract: | In prosocial decisions, decision-makers are inherently uncertain about how their decisions impact others’ utility – we call this interpersonal uncertainty. We show that people’s response to interpersonal uncertainty shapes well-known patterns of prosocial behavior. First, using standard social allocation decisions, we replicate the classic patterns of ingroup favoritism, merit-based fairness ideals, and self-favoring behavior in dictator games. We then show that these patterns also arise in non-social decisions which have no consequences for others and instead solely reflect responses to interpersonal uncertainty. Behavior across social and non-social decisions is highly correlated, and self-reported interpersonal uncertainty predicts behavior in both situations. Moreover, exogenously varying interpersonal uncertainty shifts prosocial behavior in the direction that avoids such uncertainty. Our results quantify how beliefs in the form of inter-personal uncertainty influence prosocial behavior, which we estimate to be of similar importance to social preferences. |
| Keywords: | prosocial behaviour, social preferences, ingroup versus outgroup decisions, dictator games, fairness preferences, interpersonal uncertainty |
| JEL: | C91 D01 D91 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11193 |
| By: | Cesa-Bianchi, Nicol`o; Colomboni, Roberto; Kasy, Maximilian |
| Abstract: | We consider the problem of repeatedly choosing policies to maximize social welfare. Welfare is a weighted sum of private utility and public revenue. Earlier outcomes inform later policies. Utility is not observed, but indirectly inferred. Response functions are learned through experimentation. We derive a lower bound on regret, and a matching adversarial upper bound for a variant of the Exp3 algorithm. Cumulative regret grows at a rate of T2/3. This implies that (i) welfare maximization is harder than the multi-armed bandit problem (with a rate of T1/2 for finite policy sets), and (ii) our algorithm achieves the optimal rate. For the stochastic setting, if social welfare is concave, we can achieve a rate of T1/2 (for continuous policy sets), using a dyadic search algorithm. We analyze an extension to nonlinear income taxation, and sketch an extension to commodity taxation. We compare our setting to monopoly pricing (which is easier), and price setting for bilateral trade (which is harder). (Stone Center on Socio-Economic Inequality Working Paper) |
| Date: | 2024–07–31 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:bgcjk |
| By: | Mario Ghossoub; Qinghua Ren; Ruodu Wang |
| Abstract: | In risk-sharing markets with aggregate uncertainty, characterizing Pareto-optimal allocations when agents might not be risk averse is a challenging task, and the literature has only provided limited explicit results thus far. In particular, Pareto optima in such a setting may not necessarily be comonotonic, in contrast to the case of risk-averse agents. In fact, when market participants are risk-seeking, Pareto-optimal allocations are counter-monotonic. Counter-monotonicity of Pareto optima also arises in some situations for quantile-optimizing agents. In this paper, we provide a systematic study of efficient risk sharing in markets where allocations are constrained to be counter-monotonic. The preferences of the agents are modelled by a common distortion risk measure, or equivalently, by a common Yaari dual utility. We consider three different settings: risk-averse agents, risk-seeking agents, and those with an inverse S-shaped distortion function. In each case, we provide useful characterizations of optimal allocations, for both the counter-monotonic market and the unconstrained market. To illustrate our results, we consider an application to a portfolio choice problem for a portfolio manager tasked with managing the investments of a group of clients, with varying levels of risk aversion or risk seeking. We determine explicitly the optimal investment strategies in this case. Our results confirm the intuition that a manager investing on behalf of risk-seeking agents tends to invest more in risky assets than a manager acting on behalf of risk-averse agents. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.16099 |
| By: | Moritz A. Drupp; Jasper N. Meya; Björn Bos; Simon Disque |
| Abstract: | We study the heterogeneity of preferences regarding the limited substitutability of environmental public goods vis-a-vis private consumption goods and how it affects the economic valuation of environmental public goods. We show theoretically that mean marginal willingness to pay for an environmental public good decreases in society’s mean substitutability preference and increases in the heterogeneity of individual-level substitutability preferences. We then introduce an experimental framework to elicit individual-level substitutability preferences for the first time directly, which we apply to study general population preferences concerning the trade-off between market goods and forest ecosystem services. We estimate preference parameters for almost 1, 500 individuals and document substantial preference heterogeneity. The majority of individual preferences imply a complementary relationship, with a median elasticity of substitution (complementarity) of around 0.4 (2.5). We show that accounting for heterogeneity in substitutability preferences may considerably increase the societal value attached to environmental public goods. These findings are relevant for environmental cost-benefit analysis and for the comprehensive accounting of public natural capital. |
| Keywords: | substitutability, complementarity, heterogeneous preferences, non-market valuation, experiment, donations, public goods, policy appraisal |
| JEL: | Q51 Q56 H41 D64 C99 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11197 |
| By: | Zhen, Shihang; Xia, Xianli; Huang, Luchen; Cao, Yihan; Fu, Hanliang; Ren, Yanjun |
| Abstract: | With the prominence of nutrition-related health issues worldwide, functional food is supposed to be an efficient way to address this challenge by achieving its nutrition and health benefits. However, whether consumers are willing to pay (WTP) for high-nutritional value foods of this kind and what is the role of consumers’ risk preferences in their WTPs are unclear. This study employs a discrete choice experiment (DCE) to investigate the effect of risk preferences on consumers’ preferences and WTPs for functional food, focusing on four attributes of dairy products: origin, organic label, functionality and price. We also seek to understand the physiological mechanisms underlying this effect by a lab experiment using eye-tracking technology. The results show that consumers have various preferences and WTPs for different attributes of milk, but they are reluctant to pay for functional milk. Compared to consumers with low-risk preferences, consumers with high-risk preferences are more willing to purchase functional milk. The evidence from eye-tracking experiments indicates that visual attention to the attributes considered positively correlates with their consumption preference. Consumers with high-risk preferences tend to pay more attention to the functional attribute and therefore have a higher prob- ability of purchasing functional milk. This study implies that consumers’ risk preferences should be considered when promoting consumers to purchase functional food, as different consumers have significantly distinct preferences. |
| Keywords: | Food Consumption/Nutrition/Food Safety, Institutional and Behavioral Economics |
| Date: | 2024–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:ags:cfcp15:344293 |
| By: | Felipe Araujo; Alex Imas; Alistair Wilson |
| Abstract: | We demonstrate the pitfalls when extrapolating behavioral findings across different contexts and decision environments. We focus on regret theory and the use of “regret lotteries” for motivating behavior change. Here, findings from one-shot settings have been used to promote regret as a tool to boost incentives in recurrent decisions across many settings. Using theory and experiments, we replicate regret lotteries as the superior one-shot incentive; however, for repeated decisions the comparative static is entirely reversed. Moreover, the effects are extremely sensitive to details of regret implementation. Our results suggest caution should be used when designing incentive schemes that exploit regret. |
| JEL: | D0 D03 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32759 |
| By: | Sharma, Shashidharan |
| Abstract: | This paper aims to address a gap in literature at the intersection of cheating in auctions and emotional responses. In a second price auction with a cheating seller, we model the bidder's dislike for the possibility of cheating by drawing upon the idea of reference point-based utility. A symmetric increasing equilibrium strategy is characterised and comparative statics are analysed. A comparison of expected payoffs to honest and dishonest sellers is made. We find that if reference points are low enough then the cheating seller's payoff is lower than what a seller earns in a regular first-price auction. Our results show that even with bidders disliking cheating, honest sellers lose out due to bidders shading their bids to accommodate for the possibility of being cheated. |
| Keywords: | Second Price Auctions, Reference Dependence, Emotional Responses |
| JEL: | D44 D89 |
| Date: | 2022–12–27 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121492 |
| By: | Chaigneau, Pierre |
| Abstract: | We introduce two dimensions of uncertainty, about the upside and the downside of an asset, in a model of asset valuation under asymmetric information. This justifies capital structures with equity and risky debt for information revelation purposes. However, a capital structure with only one information-sensitive security, equity, can be optimal when investors are less informed about the dimension that matters more for valuation. This is relevant for innovative firms with a large upside subject to strong information asymmetries, which often have abnormally low leverage, and for firms at an intermediate stage of their life cycle that don't issue risky debt. |
| Keywords: | capital structure, downside risk, security design, tranching, upside potential |
| JEL: | G11 G14 |
| Date: | 2023–06 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121397 |
| By: | Hendrik Döpper; Alexander MacKay; Nathan H. Miller; Joel Stiebale |
| Abstract: | We characterize the evolution of markups for consumer products in the United States from 2006 to 2019. Using detailed data on prices and quantities for products in more than 100 distinct product categories, we estimate flexible demand systems and recover markups under an assumption that firms set prices to maximize profit. Our empirical strategy obtains a panel of consumer preferences and marginal costs based on the estimation of separate random coefficient models by category and year. We find that markups increased by about 30 percent on average over the sample period. The change is primarily attributable to decreases in marginal costs, as real prices only increased slightly from 2006 to 2019. Our estimates indicate that consumers have become less price sensitive over time. |
| JEL: | D20 D40 L10 L2 L81 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32739 |
| By: | Frances C. Moore |
| Abstract: | Key methodologies used for managing weather risks have relied on the assumption that climate is not changing and that the historic weather record is therefore representative of current risks. Anthropogenic climate change upends this assumption, effectively reducing the information available to actors and increasing ambiguity in the estimated climate distribution, with associated costs for weather risk management and risk-averse decision-makers. These costs result purely from the knowledge that the climate could be changing, may arise abruptly, are additional to any direct costs or benefits from actual climate change, and are, to date, entirely unquantified. Using a case study of extreme rainfall-related flood damages in New York City, this paper illustrates how these ambiguity-related costs arise. Greater uncertainty over the current climate distribution interacts with a steeply non-linear damage function to greatly increase the mean and variance of the posterior loss distribution. This is a systemic information shock that cannot be diversified within the insurance sector, producing higher and more volatile premiums and higher reinsurance costs. These effects are consistent with recent developments in US property insurance markets, where premium increases, bankruptcies, and insurer withdrawals have been linked to the growing costs of natural disasters. |
| JEL: | G52 Q54 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32684 |