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Influential economic approaches as random utility models assume a monotonic relation between choice frequencies and “strength of preference,” in line with widespread evidence from the cognitive sciences, which also document an inverse relation to response times. However, for economic decisions under risk, these effects are largely untested, because models used to fit data assume them. Further, the dimension underlying strength of preference remains unclear in economics, with candidates including payoff-irrelevant numerical magnitudes. We provide a systematic, out-of-sample empirical validation of these relations (both for choices and response times) relying on both a new experimental design and simulations.

Diese Diplomarbeit untersucht exponentielle Nutzenindifferenzpreise und das optimale Investitionsproblem für nicht replizierbare Eventualforderungen auf einem unvollständigen Markt, unter der Annahme, dass diese asymptotisch verschwindet. Eine tiefe Beziehung zwischen der Theorie großer Abweichungen und optimalen Abnahmemengen für einen Investor mit exponentiellem Nutzen wird vorgestellt. Um asymptotisches Verschwinden der nicht replizierbaren Komponenten zu betrachten, wird das Konzept der "halb-vollständigen" Märkte eingeführt und die erforderlichen Ergebnisse entsprechend diesem Rahmen formuliert. Darüber hinaus wird eine Folge von halb-vollständigen Märkten betrachtet, bei denen die unvollständigen Komponenten für den Markt im Grenzwert verschwinden. Dies führt zur Annahme eines Prinzips der großen Abweichungen für den nicht absicherbaren Teil. In diesem Rahmen werden der Grenzwert des Nutzenindifferenzpreises, sowie optimale Abnahmemengen ermittelt. Entgegen den Erwartungen, wird für den Grenzwert, dessen Markt vollständig ist, der Nutzenindifferenzpreis für unbeschränkte Positionen nicht mit dem Replikationskapital übereinstimmen, sowie es für beschränkte Handelsgrößen der Fall ist. Diese nicht triviale Differenz kann explizit mit Hilfe des Lemmas von Varadhan berechnet werden. Darüber hinaus wird gezeigt, wie große Positionen auf natürliche Weise entstehen, indem nach optimalen Mengen gefragt wird. Diese Arbeit basiert weitgehend auf dem Artikel INDIFFERENCE PRICING FOR CONTINGENT CLAIMS: LARGE DEVIATIONS EFFECTS von Robertson und Spiliopoulos, 2018., This thesis studies exponential utility indifference prices and the optimal investment problem for non-replicable contingent claims in an incomplete market, which asymptotically vanish. A deep relationship between large deviations and optimal purchase quantities for an investor with exponential utility is presented. In order to consider asymptotic vanishing of the non-replicable components, the concept of semi-complete markets is introduced and the required results are formulated according to this framework. Furthermore, a sequence of semi-complete markets will be considered, therein the incomplete components vanishing for the limiting market, i.e. \(n\to\infty\). This leads to an assumed large deviation principle (LDP) for the unhedgeable part. In this setting limiting utility indifference prices and the optimal purchase quantities will be determined. For unbounded positions, the limiting utility indifference price will vary from the one for bounded position sizes. This non-trivial difference can be explicitly calculated by using Varadhan's integral lemma. In addition, there will be shown how large positions occur naturally by asking for optimal quantities. This work is largely based on the paper INDIFFERENCE PRICING FOR CONTINGENT CLAIMS: LARGE DEVIATIONS EFFECTS by Robertson and Spiliopoulos, 2018.

Although both betweenness and closeness centrality are claimed to be important for the effectiveness of someone's network position, it has not been explicitly studied which networks emerge if actors follow incentives for these two positional advantages. We propose such a model and observe that network dynamics differ considerably in a scenario with either betweenness or closeness incentives compared to a scenario in which closeness and betweenness incentives are combined. Considering social consequences, we find low clustering when actors strive for either type of centrality. Surprisingly, actors striving for closeness are likely to reach networks with relatively low closeness and high betweenness, while this is the other way round for actors striving for betweenness. This shows that in both situations the network formation process implies a social dilemma in which the social optimum is not reached by individual optimizing.

We consider a network of players endowed with individual preferences and involved in interactions of various patterns. We show that their ability to make choices according to their preferences is limited, in a specific way, by their involvement in the network. The earlier literature demonstrated the conflict between individuality and peer pressure. We show that such a conflict is also present in contexts in which players do not necessarily aim at conformity with their peers. We investigate the consequences of preference heterogeneity for different interaction patterns, characterize corresponding equilibria and outline the class of games in which following own preferences is the unique Nash equilibrium. The introduction of personal preferences changes equilibrium outcomes in a non-trivial fashion: some equilibria disappear, while other, qualitatively new, appear. These results are robust to both independent and interdependent relationship between personal and social utility components.

In der Literatur zur Steuerwirkung des CAPM wurde bisher unterstellt, dass die Steuerzahlungen nicht an die Marktteilnehmer zurückverteilt werden. Diese Annahme ist unrealistisch. Wir lassen sie in diesem Modell fallen. Aus der allgemeinen Gleichgewichtstheorie ist bekannt, dass bei einem risikolosen Zinssatz rf=0 die Einführung einer Steuer keinen Einfluss auf die Preise hat. Wir zeigen, dass dieses Ergebnis bei Rückverteilung der Steuereinnahmen auch auf das CAPM übertragen werden kann und auch dann gilt, wenn die Investoren æ-s-Nutzenfunktionen mit konstanter absoluter Risikoaversion aufweisen. The traditional literature on the CAPM assumes that the tax payments of the investors simply vanish from the model. This assumption is not at all consistent with the actual behaviour of the tax man. From the theory of general equilibrium we know that an interest rate rf=0 will not affect prices if taxes are introduced. We show that this result can be extended to the CAPM if the tax payments are redistributed among investors. Furthermore, the result also holds for nonvanishing interest rates if the investors have constant absolute risk aversion.

This paper studies collective decision making with regard to convex risk measures: It addresses the question whether there exist nondictatorial aggregation functions of convex risk measures satisfying Arrow-type rationality axioms (weak universality, systematicity, Pareto principle). Herein, convex risk measures are identified with variational preferences on account of the Maccheroni-Marinacci-Rustichini (2006) axiomatisation of variational preference relations and the Föllmer- Schied (2002, 2004) representation theorem for concave monetary utility functionals. We prove a variational analogue of Arrow's impossibility theorem for finite electorates. For infinite electorates, the possibility of rational aggregation depends on a uniform continuity condition for the variational preference profiles; we prove variational analogues of both Campbell's impossibility theorem and Fishburn's possibility theorem. The proof methodology is based on a model-theoretic approach to aggregation theory inspired by Lauwers-Van Liedekerke (1995). An appendix applies the Dietrich-List (2010) analysis of majority voting to the problem of variational preference aggregation.

We extend the equivalence between Bayesian and dominant strategy implementation established by Gershkov et al. (Econometrica, 2013) to environments with non-linear utilities satisfying the property of increasing differences over distributions and the convex-valued assumption. The new equivalence result produces novel implications to the literature on the principal-agent problem with allocative externalities, environmental mechanism design, and public good provision.

The paper proposes an innovative framework for characterizing investors' behavior in portfolio selection. The approach is based on the realistic perspective of unknown investors' utility and incomplete information on returns distribution. Using a four-moment generalization of the Chebyshev inequality, an intuitive risk measure, risk horizon, is introduced with reference to the speed of convergence of a portfolio's mean return to its expectation. Empirical implementation provides evidence on the consistency of the approach with standard portfolio criteria such as, among others, the Sharpe ratio, a shortfall probability decay-rate optimization and a general class of flexible three-parameter utility functions.

Many studies explore departures from expected utility. Here, we show that expected utility's key assumption - independence - can be decomposed into two distinct axioms - betweenness and homotheticity - and that these two axioms are necessary and sufficient for independence. Thus, independence can fail because homotheticity, betweenness, or both are violated. Most research has focused on models that assume subjects will violate both axioms, or models that assume subjects will satisfy betweenness but violate homotheticity. Our decomposition of independence highlights, however, a class of risk preferences that have not gained much theoretical attention: those that violate betweenness, but satisfy homotheticity. As a first step toward exploring this neglected class of risk preferences, we use data from a revealed preference experiment. Without making any parametric assumptions, we show that about 1/3 of participants violated independence but made choices consistent with homotheticity, a pattern of behavior indicating that betweenness was violated. Another 1/3 of participants satisfied independence. The remaining 1/3 violated both independence and homotheticity and may also have violated betweenness. These results are suggestive that, despite the lack of theoretical attention, preferences in the homothetic non-betwenness class can be empirically relevant for decision-making under risk.

Ein Entscheidungsträger steht in vielen Fällen vor der Aufgabe, aus einer gegebenen Menge das für ihn am besten geeignete Element zu finden. Um dieses Problem erfolgreich zu bewältigen, ist er darauf angewiesen, die ihm zur Auswahl stehenden Alternativen miteinander vergleichen zu können. Basierend auf diesem grundlegenden Sachverhalt wird in der Vektoroptimierung oft mit reellen linearen Räumen gearbeitet, die mit einer Halbordnung versehen sind. Diese Halbordnungen werden in der Regel durch Ordnungskegel erzeugt. In vielen Situationen ist der Anteil eines solchen Ordnungskegels am gesamten Raum verschwindend gering, d.h. der Entscheidungsträger ist nicht in der Lage, zwei beliebige Vektoren des Raumes gegeneinander abzuwägen. Das Ziel dieser Arbeit ist es daher, die durch einen Ordnungskegel induzierte Halbordnung zu erweitern. Zu diesem Zweck definieren wir eine neue parametrisierte binäre Relation. Wir stellen die mathematischen Eigenschaften dieser Relation im Detail dar und führen mit deren Hilfe unterschiedliche Minimalitätskonzepte ein. Für diese verschiedenen Minimalitätsbegriffe leiten wir Skalarisierungsaussagen her und formulieren insbesondere notwendige und hinreichende Bedingungen für optimale Elemente einer Menge. Wir befassen uns mit den KKT-Bedingungen und verallgemeinern die Multiplikatorenregel von Lagrange. Schließlich wenden wir die erhaltenen Ergebnisse auf ein multikriterielles und ein konisches Optimierungsproblem an. In many cases a decision maker is concerned with the task to determine the most appropriate element of a given set. To manage this problem successfully, he must be able to compare the available alternatives. Based on this elementary fact, in vector optimization one often works with real linear spaces equipped with a partial ordering. These partial orderings are usually generated by ordering cones. In many situations, however, such an ordering cone is too small with respect to the whole space, i.e. the decision maker is not in a position to compare two arbitrary vectors of the space. Therefore, in our thesis, we extend the partial ordering which is induced by an ordering cone. For this purpose, we define a new parameterized binary relation. We investigate the mathematical properties of this relation in detail and use it to establish different minimality concepts. For these distinct minimality notions we derive scalarization results and, in particular, we formulate necessary and sufficient conditions for optimal elements of a set. Moreover, we study the KKT conditions and generalize the Lagrange multiplier rule. Finally, we apply the obtained results to a multiobjective and to a conic optimization problem, respectively.

In the presence of inequality a status-driven utility function reconciles the conflict between income-based and nutrition-based measures of poverty. Moreover, it can explain why the poor tend to save less, an established empirical fact in the developing countries. The result is independent of the assumption of imperfect capital market. The paper attempts to integrate various strands of literature on status effects.

In diesem Buch schlage ich eine radikal neuartige Sicht auf den Utilitarismus vor. Meine Hauptthese ist, dass der Utilitarismus selbst keine vollständige normative Theorie ist, aus der sich per se Handlungsbewertungen ableiten ließen, sondern normativ untersättigt und neutral ist. Sein normativer Gehalt ist vollständig abhängig von angenommenen Nutzenfunktionen. Jede konsistente Menge von moralischen Regeln (Moralsystem) kann, wie ich im Anhang beweise, als ein Spezialfall des Utilitarismus interpretiert werden. Um dies zu explizieren, stelle ich utilitaristische Interpretationen verschiedener Moralpositionen vor: Zwei alltagsmoralische Regeln (das Gebot, Versprechen zu halten und das Tötungsverbot), egalitäre Positionen zu Verteilungsfragen sowie die Rawls’sche Theorie der Gerechtigkeit. Hierbei gebe ich stets korrespondierende Nutzenfunktionen an, deren Vorliegen Utilitaristen auf die interpretierten moralischen Positionen verpflichtet. Die Frage nach dem normativen Gehalt des Utilitarismus schlechthin ist somit falsch gestellt. Ein Großteil der Kritik des Utilitarismus als moralische Theorie läuft ins Leere, denn sie kritisiert einen solchen nur scheinbar eigenständigen normativen Gehalt des Utilitarismus, den sie selbst durch unterstellte Nutzenfunktionen erst erzeugt. Die Verteidigung des Utilitarismus verfehlt ebenso oft das Ziel, wenn sie zur Rettung des Utilitarismus an sich konkurrierende Nutzenfunktionen ins Feld führt, ohne die normative Neutralität des Utilitarismus generell zu thematisieren. Diese normative Neutralität macht den Utilitarismus gleichsam zur Normalform der Ethik, denn jeder moralische Disput lässt sich in einen Disput über korrespondierende Nutzenfunktionen überführen. Der Utilitarismus ist also nicht moralische Theorie, sondern vielmehr die Methode der Ethik. In this book I suggest to look at utilitarianism in a radical new way. My key starting point is that utilitarianism in itself is not a complete normative theory from which judgements of actions could be drawn but instead that utilitarianism is normatively undersaturated and neutral. Its normative content is entirely dependent on assumed utility functions. Every consistent set of moral rules (moral system) can, as I prove in the appendix, be interpreted as a special case of utilitarianism. To explicate this, I give utilitarian interpretations of a number of different moral positions: two everyday moral rules (the rule to keep promises and the prohibition of killing), egalitarian positions on distribution, and the Rawlsian theory of justice. In each case I propose corresponding utility functions that commit utilitarians to the interpreted moral position. Thus, asking about the normative content of utilitarianism in itself is meaningless. Much of the critique of utilitarianism as a moral theory misses the point as it criticizes such an assumed normative content of utilitarianism in itself while imputing the existence of certain utility functions. Many defendants of utilitarianism fall for the same mistake, as they propose rival utility functions to rescue their assumed normative content of utilitarianism without addressing the general normative neutrality of utilitarianism. For this normative neutrality, utilitarianism can be viewed as the normal form of ethics, because every moral dispute can be translated into a dispute over corresponding utility functions. Therefore, Utilitarianism is not a moral theory, but rather the method of ethics.

Experimental evidence stresses the importance of so-called social preferences for understanding economic behavior. Social preferences are defined over the entire allocation in a given economic environment, and not just over one's own consumption as is traditionally presumed. We study the implications for competitive market outcomes if agents have such preferences. First, we clarify under what conditions an agent behaves as if she was selfish - i.e. when her demand function is independent of others' behavior. An agent behaves as if selfish if and only if her preferences can be represented by a utility function that is separable between her own utility and the allocation of goods for all other agents. Next, we study equilibrium outcomes in economies where individual agents behave as if selfish. We how that one can identify a corresponding ego-economy such that the equilibria of the ego-economy coincide with the equilibria of the original economy. As a consequence, competitive equilibria exist and they are material efficient. In general, however, the First Welfare Theorem fails. We introduce the class of Bergsonian social utility functions, which are social utility functions that are completely separable in all agents' material utility. For such social preferences, the Second Welfare Theorem holds under a suitable growth condition. We also establish that in uncertain environments, agents with social preferences typically do not behave as if selfish. Furthermore, in the presence of public goods, both demand and equilibrium outcomes depend on social preferences.

The empirical relation between happiness and religiosity is considered from the perspective of basic utility theory. An unbalanced cross-country panel data set is used to study whether religiosity can be considered as a substitute in the happiness function, which itself is held to be a proxy for the utility function. We find that the same level of happiness can be maintained with high and low levels of religiosity due to substitution along a standard indifference curve. Our empirical results are consistent with three stylized facts of the empirical literature, namely a positive correlation between happiness and religiosity, a positive correlation between happiness and income, and a negative correlation between religiosity and income.

This article proves a very general version of the Kirman-Sondermann [Journal of Economic Theory, 5(2):267-277, 1972] correspondence by extending the methodology of Lauwers and Van Liedekerke [Journal of Mathematical Economics, 24(3):217-237, 1995]. The paper first proposes a unified framework for the analysis of the relation between various aggregation problems and the social structure they induce, based on first-order predicate logic and model theory. Thereafter, aggregators satisfying Arrow-type rationality axioms are shown to be restricted reduced product constructions with respect to the filter of decisive coalitions; an oligarchic impossibility result follows. Under stronger assumptions, aggregators are restricted ultraproduct constructions, whence a generalized Kirman-Sondermann correspondence as well as a dictatorial impossiblity result follow.

We consider a formal approach to comparative risk aversion and applies it to intertemporal choice models. This allows us to ask whether standard classes of utility functions, such as those inspired by Kihlstrom and Mirman [15], Selden [26], Epstein and Zin [9] and Quiggin [24] are well-ordered in terms of risk aversion. Moreover, opting for this model-free approach allows us to establish new general results on the impact of risk aversion on savings behaviors. In particular, we show that risk aversion enhances precautionary savings, clarifying the link that exists between the notions of prudence and risk aversion., Economics Working Paper Series, 10/134

In der Diskussion zur Nachhaltigen Entwicklung hat die soziale Dimension im Verhältnis zu den beiden anderen, d.h. der ökonomischen und der ökologischen Dimensionen, bisher eine relativ geringe Zuwendung erfahren. Dabei ist soziale Nachhaltigkeit, die den gesellschaftlichen Zusammenhalt in Humanität, Freiheit und Gerechtigkeit zum Ziel hat, nicht weniger bedeutend, um die Zukunftsfähigkeit einer Gesellschaft aber auch einer Volkswirtschaft zu gewährleisten. Zum Konzept der sozialen Nachhaltigkeit gibt es verschiedene Zugänge. Dieser Beitrag beleuchtet das Thema aus Sicht der Neuen Institutionsökonomik, einem Forschungsgebiet, das auf dem Konzept des Grenznutzens beruht. Mit der Kohäsionsfunktion, den interdependenten Nutzenfunktionen und dem Transaktionskostenansatz, die in diesem Beitrag erläutert werden, bietet es eine theoretische Grundlage zum Verständnis des gesellschaftlichen Zusammenhalts. In the discussion on the the topic of Sustainable Development, the social dimension hasn’t gained as much attention as the environmental and the economic dimensions heretofore. At the same time, the social dimension with its goal of social coherence in humanity, freedom and social justice is not less important to ensure sustainability of a society or a national economy. The New Institutional Economics, an emerging area of economical research, which is based on the concept of marginal utility, provides a new access to the idea of social sustainability. In this article, the coherence function, the interdependent utility function and the approach of transaction costs, which are parts of this new field of research, build the theoretical foundation for the social coherence.

This article investigates the representative-agent hypothesis for a population which faces a collective choice from a given finite-dimensional space of alternatives. Each individual’s preference ordering is assumed to admit a utility representation through an element of an exogenously given set of admissible utility functions. In addition, we assume that (i) the class of admissible utility functions allows for a smooth parametrization and only consists of strictly concave functions, (ii) the population is infinite, and (iii) the social welfare function satisfies Arrovian rationality axioms. We prove that there exists an admissible utility function r , called representative utility function, such that any alternative which maximizes r also maximizes the social welfare function. Given the structural similarities among the admissible utility functions (due to parametrization), we argue that the representative utility function can be interpreted as belonging to an – actual or invisible – individual. The existence proof for the representative utility function utilizes a special nonstandard model of the reals, viz. the ultrapower of the reals with respect to the ultrafilter of decisive coalitions; this construction explicitly determines the parameter vector of the representative utility function.

Economists often analyze cross-sectional data to estimate the value people implicit place on attributes of goods using hedonic methods. Usually strong enough assumptions are made on the functional form of utility to point identify individuals' willingness-to-pay (WTP) for changes in attribute levels. Instead, this paper develops a new way to partially identify WTP under a weak set of conditions on the shape of individual indifference curves. In particular, indifference curves are assumed to be increasing and convex in an attribute-cost space that is finitely bounded above. These shape restrictions provide informative partial identification without relying on functional form restrictions for utility. Identification given general, potentially discrete, as well as smooth price functions is analyzed. To illustrate this method, we contribute to the literature on the value of a statistical life (VSL) by analyzing labor market data to study people's willingness to pay (WTP) for reductions in levels of fatal risk. The paper contrasts VSL estimates from conventional analysis with the bounds obtained under this new approach using a common data set. The data are shown to be consistent with a wide range of WTP values even given equilibrium and credible shape restrictions. This suggests that conventional estimates may be driven by functional form restrictions imposed on utility rather than by the data or properties of equilibrium.

This paper provides evidence from Internet-based, large-scale survey data of hypothetical choice experiment on the relative utility hypothesis. The methodology exploited here complements previous empirical results from happiness studies, incentivized choice experiment studies, and neuroscience studies in such a way that methodological problems among previous studies within these fields are resolved. We show that not only the intensity but also the distribution of relative utility are different across specific comparison benchmarks (internal reference group), and across types of reference groups people are facing in the experiments (external reference group). The relative utility effect among Japanese respondents, while shown to exist in the form of jealousy, is found to be not as strong as can validate the Easterlin paradox. Comparison benchmark with daily contacts is related to stronger jealousy. We also provide empirical evidence, which nuances that the reference group is chosen endogenously.

We show that if an agent is uncertain about the precise form of his utility function, his actual relative risk aversion may depend on wealth even if he knows his utility function lies in the class of constant relative risk aversion (CRRA) utility functions. We illustrate the consequences of this result for asset allocation: poor agents that are uncertain about their risk aversion parameter invest less in risky assets than wealthy investors with identical risk aversion uncertainty. Keywords: Risk Aversion , Preference Uncertainty , Risk-taking , Asset Allocation JEL Classification: D81, D84, G11 This Version: November 25, 2010

In der Diskussion zur Nachhaltigen Entwicklung hat die soziale Dimension im Verhältnis zu den beiden anderen, d.h. der ökonomischen und der ökologischen Dimensionen, bisher eine relativ geringe Zuwendung erfahren. Dabei ist soziale Nachhaltigkeit, die den gesellschaftlichen Zusammenhalt in Humanität, Freiheit und Gerechtigkeit zum Ziel hat, nicht weniger bedeutend, um die Zukunftsfähigkeit einer Gesellschaft aber auch einer Volkswirtschaft zu gewährleisten. Zum Konzept der sozialen Nachhaltigkeit gibt es verschiedene Zugänge. Dieser Beitrag beleuchtet das Thema aus Sicht der Neuen Institutionsökonomik, einem Forschungsgebiet, das auf dem Konzept des Grenznutzens beruht. Mit der Kohäsionsfunktion, den interdependenten Nutzenfunktionen und dem Transaktionskostenansatz, die in diesem Beitrag erläutert werden, bietet es eine theoretische Grundlage zum Verständnis des gesellschaftlichen Zusammenhalts. In the discussion on the the topic of Sustainable Development, the social dimension hasn’t gained as much attention as the environmental and the economic dimensions heretofore. At the same time, the social dimension with its goal of social coherence in humanity, freedom and social justice is not less important to ensure sustainability of a society or a national economy. The New Institutional Economics, an emerging area of economical research, which is based on the concept of marginal utility, provides a new access to the idea of social sustainability. In this article, the coherence function, the interdependent utility function and the approach of transaction costs, which are parts of this new field of research, build the theoretical foundation for the social coherence.

It is well known that the literature on judgment aggregation inherits the impossibility results from the aggregation of preferences that it generalises. This is due to the fact that the typical judgment aggregation problem induces an ultrafilter on the the set of individuals, as was shown in a model theoretic framework by Herzberg and Eckert (2009), generalising the Kirman-Sondermann correspondence and extending the methodology of Lauwers and Van Liedekerke (1995). In the finite case, dictatorship then immediately follows from the principality of an ultrafilter on a finite set. This is not the case for an infinite set of individuals, where there exist free ultrafilters, as Fishburn already stressed in 1970. The main problem associated with free ultrafilters in the literature on aggregation problems is however, the arbitrariness of their selection combined with the limited anonymity they guarantee (which already led Kirman and Sondermann (1972) to speak about invisible dictators). Following another line of Lauwers and Van Liedekerke's (1995) seminal paper, this note explores another source of impossibility results for free ultrafilters: The domain of an ultraproduct over a free ultrafilter extends the individual factor domains, such that the preservation of the truth value of some sentences by the aggregate model - if this is as usual to be restricted to the original domain - may again require the exclusion of free ultrafilters, leading to dictatorship once again.

This article assesses how the form of the utility function in discrete-choice experiments (DCEs) affects estimates of willingness-to-pay (WTP). The utility function is usually assumed to be linear in its attributes. Non-linearities, in the guise of interactions and higher-order terms, are applied only rather ad hoc. This paper sheds some light on this issue by showing that the linear utility function can be a risky choice in DCEs. For this purpose, a DCE conducted in Switzerland to assess preferences for statutory social health insurance is estimated in two ways: first, using a linear utility function; and second, using a non-linear utility function specified according to model specification rules from the econometrics and statistics literature. The results show that not only does the non-linear function outperform the linear specification with regard to goodness-of-fit, but it also generates significantly different WTP. Hence, the functional form of the utility function may have significant impact on estimated WTP. In order to produce unbiased estimates of preferences and to make adequate decisions based on DCEs, the form of the utility function should become more prominent in future experiments.

Eliaz (2004) has established a "meta-theorem" for preference aggregation which implies both Arrow's Theorem (1963) and the Gibbard-Satterthwaite Theorem (1973, 1975). This theorem shows that the driving force behind impossibility theorems in preference aggregation is the mutual exclusiveness of Pareto optimality, individual responsiveness (preference reversal) and non-dictatorship. Recent work on judgment aggregation has obtained important generalizations of both Arrow's Theorem (List and Pettit 2003, Dietrich and List 2007a) and the Gibbard-Satterthwaite Theorem (Dietrich and List 2007b). One might ask, therefore, whether the impossibility results in judgment aggregation can be unified into a single theorem, a meta-theorem which entails the judgment-aggregation analogues of both Arrow's Theorem and the Gibbard-Satterthwaite Theorem. For this purpose, we study strong monotonicity properties (among them non-manipulability) and their mutual logical dependences. It turns out that all of these monotonicity concepts are equivalent for independent judgment aggregators, and the strongest monotonicity concept, individual responsiveness, implies independence. We prove the following meta-theorem: Every systematic non-trivial judgment aggregator is oligarchic in general and even dictatorial if the collective judgment set is complete. However, systematicity is equivalent to independence for blocked agendas. Hence, as a corollary, we obtain that every independent (in particular, every individually responsive) non-trivial judgment aggregator is oligarchic. This result is a mild generalization of a similar theorem of Dietrich and List (2008), obtained by very different methods. Whilst Eliaz (2004) and Dietrich and List (2008) use sophisticated combinatorial and logical arguments to prove their results, we utilize the filter method (cf. e.g. Dietrich and Mongin, unpublished) and obtain a much simpler and more intuitive derivation of our meta-theorem.

If the marginal utility of consumption depends on health status, this will affect the economic analysis of a number of central problems in public finance, including the optimal structure of health insurance and optimal life cycle savings. In this paper, we describe the promises and challenges of various approaches to estimating the effect of health on the marginal utility of consumption. Our basic conclusion is that while none of these approaches is a panacea, many offer the potential to shed important insights on the nature of health state dependence.

This paper studies the properties of convexity (concavity) and strategic complements (substitutes) in network formation and the implications for the structure of pairwise stable networks. First, different definitions of convexity (concavity) in own links from the literature are put into the context of diminishing marginal utility of own links. Second, it is shown that there always exists a pairwise stable network as long as the utility function of each player satisfies convexity in own links and strategic complements. For network societies with a profile of utility functions satisfying concavity in own links and strategic complements, a local uniqueness property of pairwise stable networks is derived. The results do neither require any specification on the utility function nor any other additional assumptions such as homogeneity.

Ever since the classical works of Smith and Veblen, economists have recognized that individuals care about their relative positions and status in addition to their own consumption. This paper addresses a new framework of choice experiments in order to specify the shape of utility function with preference externalities. Theoretical studies on social preference, which are conducted without estimating or calibrating important parameters of social preference and put forward various propositions in accordance with the parameters assumed, can refer to the parameters estimated in this paper. Our findings complement those of happiness studies which support the view of social preference. We show that preference externality is, on average, characterized by jealousy among Japanese respondents, and also that heterogeneity in social preference parameters is driven by differences in income levels, age, and gender.

In this paper we consider the optimal stopping problem for general dynamic monetary utility functionals. Sufficient conditions for the Bellman principle and the existence of optimal stopping times are provided. Particular attention is payed to representations which allow for a numerical treatment in real situations. To this aim, generalizations of standard evaluation methods like policy iteration, dual and consumption based approaches are developed in the context of general dynamic monetary utility functionals. As a result, it turns out that the possibility of a particular generalization depends on specific properties of the utility functional under consideration.

It is shown that any completely preordered topological real algebra admits a continuous utility representation which is an algebra-homomorphism (i.e., it is linear and multiplicative). As an application of this result, we provide an algebraic characterization of the projective (dictatorial) preorders defined on Rn. We then establish some welfare implications derived from our main result. In particular, the connection with the normative property called independence of the relative utility pace is discussed.

Beckmann;s interaction model has each resident touching base in face-to-face activity with every other resident, per unit time, at the other's residence. We re-work his resulting interaction city with each resident operating with a Cobb-Douglas utility function. We then turn to a more satisfactory technology of residents interacting and solve for an interaction city with an explicit payoff to resident i for engaging in interaction.

Afriat (1967) showed the equivalence of the strong axiom of revealed preference and the existence of a solution to a set of linear inequalities. From this solution he constructed a utility function rationalizing the choices of a competitive consumer. We extend Afriat's theorem to a class of nonlinear budget sets. We thereby obtain testable implications of rational behavior for a wide class of economic environments, and a constructive method to derive individual preferences from observed choices. In an application to market games, we identify a set of observable restrictions characterizing Nash equilibrium outcomes.

In dieser Arbeit wird der Einfluss der Anlagedauer auf die strategische Asset Allokation untersucht. Als Modell wird ein Anleger angenommen, der sein Geld am Anfang auf eine Aktie (die ein Aktienportfolio repräsentiert) und eine Anleihe aufteilt und bis zum Ende das Portfolio nicht umschichtet, also eine Buy-and-Hold-Strategie wählt. Als Zielgröße optimiert er den erwarteten Nutzen des Endvermögens bei einer Nutzenfunktion mit konstanter relativer Risikoaversion. Das Endvermögen der Aktie wird als lognormalverteilt angenommen. Dieses Modell eignet sich besonders für Privatanleger. Nach der Diskussion der Modellannahmen wird die Änderung der Aktienpreisverteilung mit wachsendem Anlagezeitraum untersucht. Die Verteilung ändert sich mit dem Anlagehorizont auf eine so komplexe Art, dass Präferenzaussagen abhängig von der Risikoaversion des Anlegers sind. Als nächstes wird der optimale Aktienanteil im beschriebenen Modell untersucht. Wegen der Buy-and-Hold-Strategie ist der optimale Aktienanteil im Portfolio abhängig vom Anlagehorizont im Gegensatz zu den klassischen Modellen von Merton und Samuelson. Zwar wird für einen Spezialfall analytisch gezeigt, dass der Aktienanteil konstant ist, ansonsten aber werden numerisch Beispiele berechnet, bei denen der optimale Aktienanteil abhängig von der Risikoaversion entweder monoton steigend (weniger risikoscheu) oder fallend (risikoscheuer) mit dem Anlagehorizont ist. Für den Fall eines verschwindenden Anlagehorizonts wird eine Formel für den optimalen Aktienanteil hergeleitet. Bei der Untersuchung des Sicherheitsäquivalents des Portfolios zeigt sich, dass der Unterschied zwischen dem optimalen und dem schlechtesten Portfolio bis zu vier Prozentpunkte sicheren Zins jährlich entsprechen kann. Somit lohnt es sich für den Investor, sich mit der strategischen Asset Allokation zu beschäftigen. Der Unterschied ist in der Nähe des Optimums klein, steigt dann aber stark an. Aus diesem Grund haben kleine Schätzfehler bei den Modellparametern, wie z.B. der Risikoaversion des Kunden oder der erwarteten Aktienrendite, keine großen Auswirkungen. Ebenso ist es nach diesem Modell deshalb möglich, den Kunden – wie in der Bankpraxis oft üblich – je nach Risikoaversion in Anlegerklassen einzuteilen und für die Klassen jeweils ein Standardportfolio anzubieten. Zwar gibt es also einen Zeithorizonteffekt, da aber der optimale Aktienanteil sich nur wenig mit dem Aktienanteil ändert, sind andere Faktoren wie z.B. Humankapital wichtiger bei der Wahl der strategischen Asset Allokation. This work examines the effect of time horizon on strategic asset allocation. The model used is an investor, who distributes his money among a stock (representing a stock portfolio) and a risk-free bond without any later rebalance of the portfolio, i. e. a buy and hold strategy. He maximises the expected utility of final wealth, employing a utility function with constant relative risk aversion. The stock is assumed to be lognormal distributed. This model is suited for individual investors. After discussing the model assumptions, the change of the stock return distribution with the investment horizon is examined with various methods. The result is that stocks are not less risky over the long run but the distribution changes in such a complex way that preferences depend on the risk aversion of the investor. The optimal stock proportion in the portfolio is examined. When employing a buy and hold strategy the stock proportion depends on the time horizon contrary to the classic models of Merton and Samuelson. For one special case it is analytically shown that the stock proportion is constant. But examples are numerically calculated with the stock proportion being monotone increasing or decreasing depending on investors being less or more risk averse, respectively. For a vanishing time horizon a formula of the optimal stock proportion is derived. Examining the certainty equivalent of the portfolios a difference between the optimal and the worst portfolio up to four percentage points secure annual interest rate is shown making it worthwhile for the model investor to be concerned about the strategic asset allocation. The difference is small around the optimum, but then increases quickly. Therefore, small estimation errors of the model parameters have negligible consequences, and in this model it is justified that banks divide investors into classes to offer one standard portfolio to each investor class. There is an effect of the time horizon on the stock proportion of the portfolio, but it is rather negligible compared to other factors such as human capital.

For many people "solidarity" has become a meaningless word used in slogans - too often used without leading to any economic consequences. We show in this paper conditions under which solidarity can be a powerful instrument. In a solidary action, an individual in a group contributes to a series of actions that aims for a reallocation of scarce resources. The willingness to contribute is mainly influenced by the efficiency of the objective of the solidary action, and is enhanced by feelings of mutual exchange (solidarity) within a group.

We examine strategic procurement behaviour by governments and its effect on market structure in sectors, such as defence, where the government is the dominant consumer. In a world economy with trade between producers, and between producers and non-producers, we use a modified Dixit-Stiglitz utility function with an independent taste for variety. Governments can, in effect, choose the number of domestic firms and their size by adjusting the procurement price. Unlike the standard model with no independent taste for variety and no external sector of non-producers, there are incentives for subsidies, openness impacts on industrial structure and there are potential gains from procurement coordination between producer countries.

We argue that with interdependent utility functions growth can lead to a decline in total welfare of a society if the gains from growth are sufficiently unequally distributed in the presence of negative externalities, i.e., envy.

The impact of wage increases on job satisfaction is explored theoretically and empirically. To do this, we apply a utility function that rises with the absolute wage level as well as with wage increases. It is shown that when employees can influence their wages by exerting effort, myopic utility maximization directly implies increasing and concave shaped wage profiles. Furthermore, employees get unhappier over time staying on a certain job although wages increase. Using data from 19 waves of the German Socio-Economic Panel we find empirical support for both the form of the utility function and the decreasing job satisfaction patterns.

In der Dissertation wurde ein innovatives Portfoliomodell entwickelt, welches den Präferenzen einer großen Gruppe von Investoren entspricht, die mit der traditionellen Portfolio Selektion auf Basis von Mittelwertrendite und Varianz nicht zufrieden sind. Vor allem bezieht sich die Unzufriedenheit auf eine sehr spezifische Definition der Risiko- und Wertmaße, die angenommene Nutzenfunktion, die Risikodiversifizierung sowie die Beschränkung des Assetuniversums. Dies erschwert vor allem die Optimierung der modernen Finanzprodukte. Das im Modell verwendete Risikomaß-Ausfallrisiko drückt die Präferenzen der Investoren im Bereich unterhalb der Renditebenchmark aus. Die Renditenabweichung von der Benchmark nach oben werden nicht, wie im Falle des Mittelwertrendite-Varianz-Portfoliomodells, minimiert oder als risikoneutral, wie bei dem Mittelwertrendite-Ausfallrisiko-Portfoliomodell, betrachtet. Stattdessen wird ein Wertmaß, das Chance-Potenzial (Upper Partial Moment), verwendet, mit welchem verschiedene Investorenwünsche in diesem Bereich darstellbar sind. Die Eliminierung der Annahme der normalverteilten Renditen in diesem Chance-Potenzial-Ausfallrisiko-Portfoliomodell erlaubt eine korrekte Asset Allokation auch im Falle der nicht normalverteilten Renditen, die z. B. Finanzderivate, Aktien, Renten und Immobilien zu finden sind. Bei diesen tendiert das traditionelle Mittelwertrendite-Varianz-Portfoliomodell zu suboptimalen Entscheidungen. Die praktische Anwendung des Chance-Potenzial-Ausfallrisiko-Portfoliomodells wurde am Assetuniversum von Covered Calls, Protective Puts und Aktien gezeigt. This thesis presents an innovative portfolio model appropriate for a large group of investors which are not content with the asset allocation with the traditional, mean return-variance based portfolio model above all in term of its rather specific definition of the risk and value decision parameters, risk diversification, related utility function and its restrictions imposed on the asset universe. Its modifiable risk measure – shortfall risk – expresses variable risk preferences below the return benchmark. The upside return deviations from the benchmark are not minimized as in case of the mean return-variance portfolio model or considered risk neutral as in the mean return-shortfall risk portfolio model, but employs variable degrees of the chance potential (upper partial moments) in order to provide investors with broader range of utility choices and so reflect arbitrary preferences. The elimination of the assumption of normally distributed returns in the chance potential-shortfall risk model allows correct allocation of assets with non-normally distributed returns as e.g. financial derivatives, equities, real estates, fixed return assets, commodities where the mean-variance portfolio model tends to inferior asset allocation decisions. The computational issues of the optimization algorithm developed for the mean-variance, mean-shortfall risk and chance potential-shortfall risk portfolio selection are described to ease their practical application. Additionally, the application of the chance potential-shortfall risk model is shown on the asset universe containing stocks, covered calls and protective puts.

We show that a rational expectations equilibrium need not be incentive compatible, need not be implementable as a perfect Bayesian equilibrium and may not be fully Pareto optimal, unless the utility functions are state independent. A comparison of rational expectations equilibria with core concepts is also provided.

This paper deals with utility (or value) function for reference dependent models. A new characterization of S-shaped utility functions displaying loss aversion is put forward. Then it is used to analyze some standard forms commonly used in the literature. It is shown that, unless some parameters' restrictions are imposed, power and exponential S-shaped utilities can lead to prefer fair symmetric games to the status quo and do not display loss aversion. Finally two new examples of simple S-shaped utility functions exhibiting loss aversion are presented.

In the “perpetual youth” overlapping-generations model of Blanchard and Yaari, if leisure is a “normal” good then some agents will have negative labour supply. We suggest a solution to this problem by using a modified version of Greenwood, Hercowitz and Huffman’s utility function. The modification incorporates real money balances, so that the model may be used to analyse monetary as well as fiscal policy. In a Walrasian version of the economy, we show that increased government debt and increased government spending raise the interest rate and lower output, while an open-market operation to increase the money supply lowers the interest rate and raises output.

In this paper we show that we can replace the assumption of constant discount rate in the onesector optimal growth model with the assumption of decreasing marginal impatience without losing major properties of the model. In particular, we show that the steady state exists, is unique, and has a saddle-point property. All we need is to assume that the discount function is strictly decreasing, strictly convex and has a uniformly bounded first-derivative.

We study a class of symmetric, quasi-homothetic preferences that result in demands logarithmic in own prices when these have a negligible impact on aggregate price indices (as in monopolistic competition models). Thus marginal revenues are computationally friendly, and decreasing whenever demands are elastic. Preferences can be represented either by an additive negative exponential direct utility function, or by an expenditure function which depends on two price indices. A parameter accounts for any number of commodities. Another one affects the relevant demand elasticities, which are not constant. Commodities can be either substitutes or complements according to the size of consumption.

This paper provides a characterization of dominant strategy mechanisms with quasi-linear utilities and multi-dimensional types for a variety of preference domains. These characterizations are in terms of a monotonicity property on the underlying allocation rule.

We generalize the classical concept of a certainty equivalent to a model where an investor can trade on a capital market with several future trading dates. We show that if a riskless asset is traded and the investor has a CARA utility then our generalized certainty equivalent can be evaluated using the sum of discounted one-period certainty equivalents. This is not true if the investor has a HARA utility.

We estimate a dynamic programming model of schooling decisions in which the degree of risk aversion can be inferred from schooling decisions. In our model, individuals are heterogeneous with respect to school and market abilities but homogeneous with respect to the degree of risk aversion. We allow endogenous schooling attainments to affect the level of risk experienced in labor market earnings through wage dispersion and employment rate dispersion. We find a low degree of relative risk aversion (0.9282) and the estimates indicate that both wage and employment rate dispersions decrease significantly with schooling attainments. We find that a counterfactual increase in risk aversion will increase schooling attainments. Finally, the low degree of risk aversion implies that an increase in earnings dispersion would have little effect on schooling attainments.