Mixture models of choice under risk

This paper is concerned with estimating preference functionals for choice under risk from the choice behaviour of individuals. We note that there is heterogeneity in behaviour between individuals and within individuals. By ‘heterogeneity between individuals’ we mean that people are different, in terms of both their preference functionals and their parameters for these functionals. By ‘heterogeneity within individuals’ we mean that the behaviour may be different even by the same individual for the same choice problem. We propose methods of taking into account all forms of heterogeneity, concentrating particularly on using a Mixture Model to capture the heterogeneity of preference functionals.     

Robust firm pricing with panel data

Firms often have imperfect information about demand for their products. We develop an integrated econometric and theoretical framework to model firm demand assessment and subsequent pricing decisions with limited information. We introduce a panel data discrete choice model whose realistic assumptions about consumer behavior deliver partially identified preferences and thus generate ambiguity in the firm pricing problem. We use the minimax-regret criterion as a decision-making rule for firms facing this ambiguity. We illustrate the framework’s benefits relative to the most common discrete choice analysis approach through simulations and empirical examples with field data.     

Social distance,heterogeneity and social interactions

A crucial ingredient in social interaction models is the structure of peer groups, which link individuals with similar characteristics. We propose and study a dynamic binary choice model with social interactions in which heterogeneity of peer group effects is modeled introducing diversity in individual characteristics and linking pairwise influences to a social distance between individuals. Our framework allows for mimetic as well as anti-mimetic interactions and a heterogeneous structure of peer groups across individuals. Dynamic equilibria are studied in the limit when the number of agents is large. We show that the model exhibits multiple equilibria resulting from conflicts between various group pressures the individuals are subjected to. We study in particular the correlation in the population at equilibrium between the characteristics of the agents and their decisions: this quantity has an interesting empirical interpretation and solves a simple analytical equation when the number of agents is large. Finally we discuss the empirical content of the model and present a consistent estimator for the parameter describing which is consistent for any typical population regardless of the structure of individual characteristics.     

A RANK‐ORDERED LOGIT MODEL WITH UNOBSERVED HETEROGENEITY IN RANKING CAPABILITIES

To study preferences, respondents to a survey are usually asked to select their most preferred option from a set. Preferences can be estimated more efficiently if respondents are asked to rank all alternatives. When some respondents are unable to perform the ranking task, using the complete ranking may lead to a substantial bias. We introduce a model which endogenously describes the ranking capabilities of individuals. Estimated preferences based on this model are more efficient when at least some individuals are able to rank more than one item, and they do not suffer from biases due to ranking inabilities of respondents. Copyright © 2010 John Wiley & Sons, Ltd.     

Narrow‐Framing and Risk Preferences in Family and Non‐Family Firms

Building upon prospect theory’s concept of narrow‐framing, we explore family firms’ risk preferences across multiple decisions in corporate entrepreneurship. We argue that family firms’ decisions are less likely to be narrowly framed (more likely to be made as a group rather than in isolation) compared to non‐family firms. Examining the interaction between two risky decisions (internationalization and R&D investment) in two samples of publicly traded firms in the USA and China confirms our hypotheses. Family firms appear more likely than non‐family firms to diversify risk when making multiple decisions concerning corporate entrepreneurship. However, given inferior performance, risk taking across multiple decisions in family firms is positively related.     

Many-to-one matching markets with externalities among firms

We study a labor market described by a many-to-one matching market with externalities among firms in which each firm’s preferences depend not only on workers whom it hires, but also on workers whom its rival firms hire. We define a new stability concept called weak stability and investigate its existence problem. We show that when the preferences of firms satisfy an extension of substitutability and two new conditions called increasing choice and no external effect by an unchosen worker, then a weakly stable matching exists. We also show that a weakly stable matching may fail to exist without these restrictions.     

Tax morale: Framing and fairness

Tax morale has been a focus of academics and policy makers for some time. The measurement of individuals’ tax morale is subjective, and various proxies have been employed in qualitative and quantitative research. The framing of these measures has been considered in some research with respect to equivalency or goal framing, but the underlying implication of emphasis framing in commonly used proxies has yet to be considered. Further, although fairness and financial literacy have been considered determinants of tax morale, no one has yet considered whether financial and tax literacy (FTL) has a moderating effect on fairness and tax morale.This research addresses these gaps in the literature. The findings suggest that questions and scenarios posed by academics and policy makers should consider positive, negative, and emphasis framing, as well as the moderating effect of the respondents’ FTL to measure individuals’ tax morale effectively. The findings also suggest that raising levels of FTL could have a double dividend: not only will improved FTL have a positive impact on tax morale, but it might be magnified through the impact of fairness. These findings hold only when morale is determined by negatively framed scenarios. In particular, the perceived fairness of the tax system enhances tax morale when FTL is high, whereas the perception of fairness has no effect on tax morale for respondents with lower levels of FTL.     

Cooperative choice and its framing effect under threshold uncertainty in a provision point mechanism

This paper explores how threshold uncertainty affects cooperative behaviors in the provision of public goods and the prevention of public bads. The following facts motivate our study. First, environmental (resource) problems are either framed as public bads prevention or public goods provision. Second, the occurrence of these problems is characterized by thresholds that are interchangeably represented as “nonconvexity,” “bifurcation,” “bi-stability,” or “catastrophes.” Third, the threshold location is mostly unknown. We employ a provision point mechanism with threshold uncertainty and analyze the responses of cooperative behaviors to uncertainty and to the framing for each type of social preferences categorized by a value orientation test. We find that aggregate framing effects are negligible, although the response to the frame is the opposite depending on the type of social preferences. “Cooperative” subjects become more cooperative in negative frames than in positive frames, whereas “individualistic” subjects are less cooperative in negative frames than in positive ones. This finding implies that the insignificance of aggregate framing effects arises from behavioral asymmetry. We also find that the percentage of cooperative choices non-monotonically varies with the degree of threshold uncertainty, irrespective of framing and value orientation. Specifically, the degree of cooperation is highest at intermediate levels of threshold uncertainty and decreases as the uncertainty becomes sufficiently large.     

Are CEOs expected utility maximizers?

Are individuals expected utility maximizers? This question represents much more than academic curiosity. In a normative sense, at stake are the fundamental underpinnings of the bulk of the last half-century’s models of choice under uncertainty. From a positive perspective, the ubiquitous use of benefit-cost analysis across government agencies renders the expected utility maximization paradigm literally the only game in town. In this study, we advance the literature by exploring CEO’s preferences over small probability, high loss lotteries. Using undergraduate students as our experimental control group, we find that both our CEO and student subject pools exhibit frequent and large departures from expected utility theory. In addition, as the extreme payoffs become more likely CEOs exhibit greater aversion to risk. Our results suggest that use of the expected utility paradigm in decision making substantially underestimates society’s willingness to pay to reduce risk in small probability, high loss events.     

Mapping walkability. A subjective value theory approach

The analysis of urban walkability has been extensively explored in the last decades. Despite this growing attention, there is a lack of studies attentive on how citizens' values, individual abilities and urban environment favour or hinder the propensity to walk. Hence, there is a need to explore how preferences and values of citizens vary in space in order to design walkability policies able to improve the capability set of citizens. In this perspective, the design of spatial decision tools aimed to plann public policies for the development of walkable cities needs further investigation. We propose a Multiple Criteria Decision Analysis (MCDA) method aimed to elaborate walkability decision maps for different groups of citizens that reflect their capability to walk in the urban environment. We tested the method in the city of Alghero (Italy). First, we analysed walkability under a normative model named CAWS; then we made a survey with 358 participants in order to study the driving values that influence their choice to walk and finalised to build an evaluation model attentive to individual differences. Cluster analysis was employed to group citizens into 11 groups based on their sociodemographic characteristics and preferences on spatial criteria of walkability. Finally, by integrating GIS with MCDA we built a set of decision maps representative of the walkability of the 11 groups of citizens. Results highlight the importance of citizens’ values for policy design, allow the interpersonal comparison among individuals and group preferences and give new suggestions for the formulation of walkability oriented urban policies. Moreover, the results confirm the usability of the general method as a decision support tool supporting the design of urban policies.     

Equivalence of optimal noisy-ranking contests and Tullock contests

We analyze a noisy-ranking contest in which participants compete in several dimensions. The organizer randomly samples a number of dimensions and awards a prize to the most productive agent. When the contest is optimally designed, we establish a structural equivalence between this family of noisy-ranking contests and contests built upon Tullock contest success functions. Our result also shows that in this class of noisy-contests, the profit-maximization problem of the planner can be turned into a stochastic choice problem for a planner who has some deterministic preferences over the contestants’ win probabilities.     

The Contraction of Meaning: The Combined Effect of Communication,Emotions, and Materiality on Sensemaking in the Stockwell Shooting

In this paper, we seek to understand how individuals, as part of a collective, commit themselves to a single, and possibly erroneous, frame, as a basis for sensemaking and coordinated actions. Using real‐time data from an anti‐terrorist police operation that led to the accidental shooting of an innocent civilian, we analyse how individual actors framed their circumstances in communication with one another and how this affected their subsequent interpretations and actions as events unfolded. Our analysis reveals, first, how the collective commitment to a framing of a civilian as a terrorist suicide bomber was built up and reinforced across episodes of collective sensemaking. Second, we elaborate on how the interaction between verbal communication, expressed and felt emotions, and material cues led to a contraction of meaning. This contraction stabilized and reinforced the overall framing at the exclusion of alternative interpretations. With our study we extend prior sensemaking research on environmental enactment and the escalation of commitment and elaborate on the role of emotions and materiality as part of sensemaking.     

On the computability of quasi-transitive binary social choice rules in an infinite society and the halting problem

This paper investigates the computability problem of the existence of a vetoer and an oligarchy for quasi-transitive binary social choice rules (Mas-Colell and Sonnenschein in Rev Econ Stud 39:185–192, 1972) in a society with an infinite number of individuals (infinite society) according to the computable calculus (or computable analysis) by Aberth (Computable analysis, McGraw-Hill, New York, 1980; Computable calculus, Academic Press, Dublin, 2001). We will show the following results. The problem whether a quasi-transitive binary social choice rule which satisfies Pareto principle and independence of irrelevant alternatives (IIA) has a vetoer or has no vetoer in an infinite society is a nonsolvable problem, that is, there exists no ideal computer program for a quasi-transitive binary social choice rule which satisfies Pareto principle and IIA that decides whether it has a vetoer or has no vetoer. And it is equivalent to nonsolvability of the halting problem. We also show that if for any quasi-transitive binary social choice rule there exists an oligarchy in an infinite society, whether it is finite or infinite is a nonsolvable problem. A vetoer is an individual such that if he strictly prefers an alternative to another alternative, then the society prefers the former to the latter or is indifferent between them regardless of the preferences of other individuals, and an oligarchy is the minimal set of individuals which has dictatorial power and its each member is a vetoer. It will be shown that an oligarchy is a set of vetoers if it exists. This research was partially supported by the Ministry of Education, Science, Sports and Culture, Grant-in-Aid for Scientific Research (C), 20530165, and the Grant-in-Aid from the Zengin Foundation for Studies on Economics and Finance in Japan.     

On the equivalence of location choice models: Conditional logit, nested logit and Poisson

It is well understood that the two most popular empirical models of location choice - conditional logit and Poisson - return identical coefficient estimates when the regressors are not individual specific. We show that these two models differ starkly in terms of their implied predictions. The conditional logit model represents a zero-sum world, in which one region’s gain is the other regions’ loss. In contrast, the Poisson model implies a positive-sum economy, in which one region’s gain is no other region’s loss. We also show that all intermediate cases can be represented as a nested logit model with a single outside option. The nested logit turns out to be a linear combination of the conditional logit and Poisson models. Conditional logit and Poisson elasticities mark the polar cases and can therefore serve as boundary values in applied research.     

A topological approach to Wilson’s impossibility theorem

We will present a topological approach to Wilson’s impossibility theorem [Wilson, R.B., 1972. Social choice theory without the Pareto principle. Journal of Economic Theory 5, 478–486] that there exists no non-null binary social choice rule which satisfies transitivity, independence of irrelevant alternatives, non-imposition and has no dictator nor inverse dictator. Our research is in line with the studies of topological approaches to discrete social choice problems initiated by [Baryshnikov, Y., 1993. Unifying impossibility theorems: a topological approach. Advances in Applied Mathematics 14, 404–415]. This paper extends the result about the Arrow impossibility theorem shown in [Tanaka, Y., 2006. A topological approach to the Arrow impossibility theorem when individual preferences are weak orders. Applied Mathematics and Computation 174, 961–981] to Wilson’s theorem.     

Nonparametric Bayesian modelling of monotone preferences for discrete choice experiments

Discrete choice experiments are widely used to learn about the distribution of individual preferences for product attributes. Such experiments are often designed and conducted deliberately for the purpose of designing new products. There is a long-standing literature on nonparametric and Bayesian modelling of preferences for the study of consumer choice when there is a market for each product, but this work does not apply when such markets fail to exist as is the case with most product attributes. This paper takes up the common case in which attributes can be quantified and preferences over these attributes are monotone. It shows that monotonicity is the only shape constraint appropriate for a utility function in these circumstances. The paper models components of utility using a Dirichlet prior distribution and demonstrates that all monotone nondecreasing utility functions are supported by the prior. It develops a Markov chain Monte Carlo algorithm for posterior simulation that is reliable and practical given the number of attributes, choices and sample sizes characteristic of discrete choice experiments. The paper uses the algorithm to demonstrate the flexibility of the model in capturing heterogeneous preferences and applies it to a discrete choice experiment that elicits preferences for different auto insurance policies.     

Disentangling preferences and limited attention: Random-utility models with consideration sets

This paper presents a model of choice with limited attention. The decision-maker forms a consideration set, from which she chooses her most preferred alternative. Both preferences and consideration sets are stochastic. While we present axiomatisations for this model, our focus is on the following identification question: to what extent can an observer retrieve probabilities of preferences and consideration sets from observed choices? Our first conclusion is a negative one: if the observed data are choice probabilities, then probabilities of preferences and consideration sets cannot be retrieved from choice probabilities. We solve the identification problem by assuming that an “enriched” dataset is observed, which includes choice probabilities under two frames. Given this dataset, the model is “fully identified”, in the sense that we can recover from observed choices (i) the probabilities of preferences (to the same extent as in models with full attention) and (ii) the probabilities of consideration sets. While a number of recent papers have developed models of limited attention that are, in a similar sense, “fully identified”, they obtain this result not by using an enriched dataset but rather by making a restrictive assumption about the default option, which our paper avoids.     

Compromising as an equal loss principle

Review of Economic Design - A social choice rule aggregates the preferences of a group of individuals over a set of alternatives into a collective choice. The literature admits several social...     

Effects of subject pool culture and institutional environment on corruption: Experimental evidence from Albania

This research uses experimental methods to investigate whether subject pool culture and institutional environment have an effect on participants’ corrupt behavior in the laboratory. While we find that subject pool culture does not affect the overall magnitude of corruption of laboratory participants, it does affect the likelihood of corruption and its distribution. Additionally, we find that the effect on corrupt behavior differs with the framing of the experiment’s instructions. Interestingly, in the context of a weak rule of law and high levels of corruption, loaded negative instructions positively affect corrupt behavior of firms and public officials. Previous research in the context of a country exhibiting a strong rule of law and low levels of corruption finds no framing effects. We also find that increasing the probability of detection significantly reduces corruption as measured by the amount of the bribes offered/accepted and the probability of offering/accepting a bribe. Finally, we find that individual risk preferences negatively affect the level of corrupt behavior.