Recursive smooth ambiguity preferences

This paper axiomatizes an intertemporal version of the Smooth Ambiguity decision model developed in [P. Klibanoff, M. Marinacci, S. Mukerji, A smooth model of decision making under ambiguity, Econometrica 73 (6) (2005) 1849-1892]. A key feature of the model is that it achieves a separation between ambiguity, identified as a characteristic of the decision maker's subjective beliefs, and ambiguity attitude, a characteristic of the decision maker's tastes. In applications one may thus specify/vary these two characteristics independent of each other, thereby facilitating richer comparative statics and modeling flexibility than possible under other models which accommodate ambiguity sensitive preferences. Another key feature is that the preferences are dynamically consistent and have a recursive representation. Therefore techniques of dynamic programming can be applied when using this model.     

Monopolistic competition and income dispersion

We develop a model of monopolistic competition that accounts for consumers’ heterogeneity in both incomes and preferences. This model makes it possible to study the implications of income redistribution on the toughness of competition. We show how the market outcome depends on the joint distribution of consumers’ tastes and incomes and obtain a closed-form solution for a symmetric equilibrium. Competition toughness is measured by the weighted average elasticity of substitution. Income redistribution generically affects the market outcome, even when incomes are redistributed across consumers with different tastes in a way such that the overall income distribution remains the same.     

Voting for Redistribution under Desert‐Sensitive Altruism*

We endow individuals who differ in skills and tastes for working, with altruistic preferences for redistribution in a voting model where a unidimensional redistributive parameter is chosen by majority voting in a direct democracy. When altruistic preferences are desert‐sensitive (i.e., when there is a reluctance to redistribute from the hard‐working to the lazy), we show that lower levels of redistribution emerge in political equilibrium. We provide empirical evidence that preferences for redistribution are not purely selfish, and that desert‐sensitive motivations play a significant role. We estimate that preferences for redistribution are significantly more desert‐sensitive in the US than in Europe.     

Representation and aggregation of preferences under uncertainty

We axiomatize in the Anscombe-Aumann setting a wide class of preferences called rank-dependent additive preferences that includes most known models of decision under uncertainty as well as state dependent versions of these models. We prove that aggregation is possible and necessarily linear if and only if (society's) preferences are uncertainty neutral. The latter means that society cannot have a non-neutral attitude toward uncertainty on a subclass of acts. A corollary to our theorem is that it is not possible to aggregate multiple prior agents, even when they all have the same set of priors. A number of ways to restore the possibility of aggregation are then discussed.     

Stable partnerships, matching, and local public goods

In the presence of local public goods differences in tastes are an important determinant of the way in which partnerships are formed. Heterogeneity in tastes for private vs. public goods produces a tendency to positive assortment and partnerships of couples with similar tastes; heterogeneity in tastes for different public goods brings about partnerships of couples with similar tastes only if there is a significant overlap in the distribution of tastes of the two groups to be matched. We show that with two public goods we may get negative assortment, pure positive assortment being only one of many possibilities.     

Differentiating ambiguity and ambiguity attitude

The objective of this paper is to show how ambiguity, and a decision maker (DM)'s response to it, can be modelled formally in the context of a general decision model. We introduce a relation derived from the DM's preferences, called “unambiguous preference”, and show that it can be represented by a set of probabilities. We provide such set with a simple differential characterization, and argue that it is a behavioral representation of the “ambiguity” that the DM may perceive. Given such revealed ambiguity, we provide a representation of ambiguity attitudes. We also characterize axiomatically a special case of our decision model, the “α-maxmin” expected utility model.     

Ambiguity,data and preferences for information – A case-based approach

We model decision making under ambiguity based on available data. Decision makers express preferences over actions and data sets. We derive an α-max–min representation of preferences, in which beliefs combine objective characteristics of the data (number and frequency of observations) with subjective features of the decision maker (similarity of observations and perceived ambiguity). We identify the subjectively perceived ambiguity and separate it into ambiguity due to a limited number of observations and ambiguity due to data heterogeneity. The special case of no ambiguity provides a behavioral foundation for beliefs as similarity-weighted frequencies as in Billot et al. (2005) [3].     

Act similarity in case-based decision theory

Summary Case-Based Decision Theory (CBDT) postulates that decision making under uncertainty is based on analogies to past cases. In its original version, it suggests that each of the available acts is ranked according to its own performance in similar decision problems encountered in the past.The purpose of this paper is to extend CBDT to deal with cases in which the evaluation of an act may also depend on past performance of different, but similar acts. To this end we provide a behavioral axiomatic definition of the similarity function over problem-act pairs (and not over problem pairs alone, as in the original model).We propose a model in which preferences are context-dependent. For each conceivable history of outcomes (to be thought of as the context of decision) there is a preference order over acts. If these context-dependent preference relations satisfy our consistency-across-contexts axioms, there is an essentially unique similarity function that represents these preferences via the (generalized) CBDT functional.We are grateful to Akihiko Matsui for the discussions that motivated this work. We also thank Enriqueta Aragones, Roger Myerson, Zvika Neeman, Ariel Rubinstein, Peyton Young, and an anonymous referee for their comments. Partial financial support from the Alfred Sloan Foundation is gratefully acknowledged.     

The recursive approach to time inconsistency

We introduce a new class of finite horizon stochastic decision problems in which preferences change over time, and provide a proof of the existence of a recursively optimal strategy. Recursive optimization techniques dominate many areas of economic dynamics. However, in decision problems in which tastes change over time, the solution technique most commonly applied is not recursive, but rather strategic (subgame perfection). In this paper we argue in favor of the recursive approach, and we take the necessary theoretical steps to make the recursive methodology applicable.     

Strategic information transmission networks

We study a model of multi-player communication. Privately informed decision makers have different preferences about the actions they take, and communicate to influence each others? actions in their favor. We prove that the equilibrium capability of any player to send a truthful message to a set of players depends not only on the preference composition of those players, but also on the number of players truthfully communicating with each one of them. We establish that the equilibrium welfare depends not only on the number of truthful messages sent in equilibrium, but also on how evenly truthful messages are distributed across decision makers.     

Non-consequentialist voting

Standard theory assumes that voters’ preferences over actions (voting) are induced by their preferences over electoral outcomes (policies, candidates). But voters may also have non-consequentialist (NC) motivations: they may care about how they vote even if it does not affect the outcome. When the likelihood of being pivotal is small, NC motivations can dominate voting behavior. To examine the prevalence of NC motivations, we design an experiment that exogenously varies the probability of being pivotal yet holds constant other features of the decision environment. We find a significant effect, consistent with at least 12.5 percent of subjects being motivated by NC concerns.     

Preference for Flexibility and Dynamic Consistency

Dekel, Lipman, and Rustichini [3] characterize preferences over menus of lotteries that can be represented by the use of a unique subjective state space and a prior. We investigate what would be the appropriate version of Dynamic Consistency in such a setup. The condition we find, which we call Flexibility Consistency, is linked to a comparative theory of preference for flexibility. When the subjective state space is finite, we show that Flexibility Consistency is equivalent to a subjective version of Dynamic Consistency and that it implies that the decision maker is a subjective state space Bayesian updater. Later we characterize when a collection of signals can be interpreted as a partition of the subjective state space of the decision maker.     

Subjective probability over a subjective decision tree

A state space has been assumed as a primitive for modeling uncertainty, which presumes that the analyst knows all the uncertainties a decision maker (DM) perceives. This is problematic because states are private information of the DM, and hence are not directly observable to the analyst. Dekel et al. [Representing preferences with a unique subjective state space, Econometrica 69 (2001) 891-934] derive, rather than assume, the subjective state space from preference over suitable choice objects.In a dynamic setting, a decision tree, that is, a pair consisting of a state space and a filtration, has been taken as a primitive. This assumption is also problematic—a decision tree should be derived rather than assumed as a primitive. We formulate a three-stage extension of the above literature in order to model a DM who anticipates subjective uncertainty to be resolved gradually over time. We identify also subjective beliefs on the subjective state space.     

How are preferences revealed?

Revealed preferences are tastes that rationalize an economic agent's observed actions. Normative preferences represent the agent's actual interests. It sometimes makes sense to assume that revealed preferences are identical to normative preferences. But there are many cases where this assumption is violated. We identify five factors that increase the likelihood of a disparity between revealed preferences and normative preferences: passive choice, complexity, limited personal experience, third-party marketing, and intertemporal choice. We then discuss six approaches that jointly contribute to the identification of normative preferences: structural estimation, active decisions, asymptotic choice, aggregated revealed preferences, reported preferences, and informed preferences. Each of these approaches uses consumer behavior to infer some property of normative preferences without equating revealed and normative preferences. We illustrate these issues with evidence from savings and investment outcomes.     

What to maximize if you must

The assumption that decision makers choose actions to maximize their preferences is a central tenet in economics, often justified formally or informally by appealing to evolutionary arguments. In contrast, we show that in almost every game and for almost every family of distortions of a player's actual payoffs, some degree of this distortion is beneficial to the player, and will not be driven out by any evolutionary process involving payoff-monotonic selection dynamics. Consequently, under any such selection dynamics the population will not converge to payoff-maximizing behavior. We also show that payoff-maximizing behavior need not prevail when preferences are imperfectly observed.     

Optimal voting schemes with costly information acquisition

A group of individuals with identical preferences must make a decision under uncertainty about which decision is best. Before the decision is made, each agent can privately acquire a costly and imperfect signal. We discuss how to design a mechanism for eliciting and aggregating the collected information so as to maximize ex-ante social welfare.We first show that, of all mechanisms, a sequential one is optimal and works as follows. At random, one agent at a time is selected to acquire information and report the resulting signal. Agents are informed of neither their position in the sequence nor of other reports. Acquiring information when called upon and reporting truthfully is an equilibrium.We next characterize the ex-ante optimal scheme among all ex-post efficient mechanisms. In this mechanism, a decision is made when the precision of the posterior exceeds a cut-off that decreases with each additional report. The restriction to ex-post efficiency is shown to be without loss when the available signals are sufficiently imprecise. On the other hand, ex-post efficient mechanisms are shown to be suboptimal when the cost of information acquisition is sufficiently small.     

Purely procedural preferences - Beyond procedural equity and reciprocity

We conduct experiments in which parties face a pair of two-player pie-splitting procedures. Parties submit their strategy in each, their beliefs about their opponent's choices, and are also asked whether they prefer one procedure over the other. The procedures – a yes-no game, an ultimatum game, and a dictator game – are designed such that by all existing economic preference models, whether distributive or procedural, parties should be indifferent between them. In particular, the procedures should yield the same outcomes, the same expected outcomes and carry the same information on parties' intentions. At the same time, the procedures differ in the way they distribute decision and information rights across players, and also in their complexity and efficiency. Experimentally, parties do indeed still reveal preferences over the procedures at hand. To explore why this happens, we elicit individuals' simplicity and efficiency ratings of the procedures, and also the degree by which individuals invoke the equality of basic rights and liberties in their moral judgement – an ethical criterion not yet captured by any preference model. The preferences we find link to this data. We explore formalizations for such preferences.     

Social Conflict and Gradual Political Succession: An Illustrative Model*

This paper studies the evolution of political institutions in the face of conflict. We examine institutional reform in a class of pivotal mechanisms—institutions that behave as if the resulting policy were determined by a “pivotal” decision maker drawn from the potential population of citizens and who holds full policy‐making authority at the time. A rule‐of‐succession describes the process by which pivotal decision makers in period t + 1 are, themselves, chosen by pivotal decision makers in period t. Two sources of conflict—class conflict, arising from differences in wealth, and ideological conflict, arising from differences in preferences—are examined. In each case, we characterize the unique Markov‐perfect equilibrium of the associated dynamic political game, and show that public decision‐making authority evolves monotonically downward in wealth and upward in ideological predisposition toward the public good. We then examine rules‐of‐succession when ideology and wealth exhibit correlation.     

Cognitive constraints, contraction consistency, and the satisficing criterion

A theory of decision making is proposed that offers an axiomatic basis for the notion of “satisficing” postulated by Herbert Simon. The theory relaxes the standard assumption that the decision maker always fully perceives his preferences among the available alternatives, requiring instead that his ability to perceive any given preference be decreasing with respect to the complexity of the choice problem at hand. When complexity is aligned with set inclusion, this exercise is shown to be equivalent to abandoning the contraction consistency axiom of classical choice theory.