Cumulative prospect theory and the St. Petersburg paradox

Summary. We find that in cumulative prospect theory (CPT) with a concave value function in gains, a lottery with finite expected value may have infinite subjective value. This problem does not occur in expected utility theory. The paradox occurs in particular in the setting and the parameter regime studied by Tversky and Kahneman [15] and in subsequent works. We characterize situations in CPT where the problem can be resolved. In particular, we define a class of admissible probability distributions and admissible parameter regimes for the weighting- and value functions for which finiteness of the subjective value can be proved. Alternatively, we suggest a new weighting function for CPT which guarantees finite subjective value for all lotteries with finite expected value, independent of the choice of the value function. Some of these results have already been found independently by Blavatskyy [4] in the context of discrete lotteries.Received: 14 October 2004, Revised: 6 May 2005, JEL Classification Numbers: C91, D81.We thank Pavlo Blavatskyy and Thorsten Hens for their helpful remarks regarding our paper. Moreover, we thank the referee for his constructive suggestions. This research was supported by the University Research Priority Program “Finance and Financial Markets” a research instrument of the University of Zürich.     

Eliciting the core of a supermodular capacity

Summary. The paper utilizes duality theory to derive an exact representation of the core of a supermodular capacity for finite-state-space Choquet expected utility preferences. Using the dual representation we develop an algorithm that uses information on willingness to pay and willingness to sell to elicit a supermodular capacity in a finite number of iterations.Received: 21 February 2003, Revised: 26 May 2004, JEL Classification Numbers: D81. Correspondence to: Robert G. ChambersThe authors thank J. Quiggin and an anonymous referee for comments that improved the paper.     

The Troika paradox

In three binary choice problems, people reveal a choice pattern which falsifies expected utility theory and many generalized non-expected utility theories. This new paradox challenges popular non-expected utility models analogously to how the Allais paradox challenged neoclassical expected utility theory.     

A comparison of empirical models used to infer the willingness to pay in contingent valuation

The essence of the contingent valuation method consists of creating a hypothetical market where respondents are asked about their willingness to pay (WTP) for a non-market good. Different empirical models can be formulated to estimate the expected WTP of a sample of respondents and, then, through aggregation, the social valuation of the good is inferred.This paper outlines the relevance of the distributional assumptions when estimating mean WTP. Several parametric and non-parametric methods are discussed and applied to calculate the existence value of a natural space. Results show that WTP is extremely sensitive to the empirical model used.First version received: November 2002 / Final version received: January 2004     

Sunspot equilibria and the transfer paradox

Summary. We show that for international economies with two countries, in which agents have additively separable utility functions, the existence of sunspot equilibria is equivalent to the occurrence of the transfer paradox. This equivalence enables us to provide some new insights on the relation of the existence of sunspot equilibria and the multiplicity of spot market equilibria.Received: 1 October 2003, Revised: 1 April 2004, JEL Classification Numbers: C62, D52, F3, F20, 012.Correspondence to: Thorsten HensWe would like to thank Anke Gerber for carefully checking and improving our arguments. Moreover, we are grateful to Piero Gottardi for his encouragement and his comments, to Andreu Mas-Colell and Mike Jerison for very fruitful discussions and to Klaus Schenk-Hoppé for his support in using . All remaining errors are ours.     

Human resource management and productivity in the “trust game corporation”

Contemporary production activity is crucially determined by the performance of complex tasks with the characteristics of corporate trust games. In this paper, we outline a productivity paradox showing that, under reasonable conditions, the noncooperative solution, which yields a suboptimal firm output, is the equilibrium of corporate trust games when relational preferences are not sufficiently high. We show that tournaments and steeper pay for performance schemes may crowd out cooperation in the presence of players preferences for relational goods. These findings help to explain firm investment in workers’ relationships and the puzzle on the less than expected use of such schemes.     

Lost in translation – a revival of Wolfgang Stützel's Balances Mechanics

Wolfgang Stützel was a prominent German economist who coined a very special terminology in national accounting and in international economics. Therefore, it can be said that his contributions to economics got lost in translation. Especially, the Balances Mechanics approach and the paradox of competition are his biggest achievements in economic theory, but he never received international recognition. The objective of this paper is to pay tribute to his work by applying his analytical frameworks to the balance of payments crisis in the Eurozone and to the distributional impacts of austerity policy.     

On the Gibson Paradox

This paper uses recent developments in the theory of nonstationary regressors to investigate empirical relationships previously taken to support the Gibson paradox, using quarterly data over the 1957:1–1994:4 period on nominal interest rates and prices for eight European Union countries—Belgium, Denmark, England, France, Germany, Ireland, Italy, and The Netherlands. Using the methodology suggested by Kydland and Prescott, it is shown that the (relevant) cyclical nominal interest rate—price level contemporaneous correlations are weak, thereby punching a hole in the Gibson paradox. Evidence is also presented, based on the integration properties of the data, that standard Gibson paradox regressions are spurious.     

Regulatory Compliance with Costly and Uncertain Litigation

Harrington (1988) and more recent papers by Heyes and Rickman (1999), Livernois and McKenna (1999), and Heyes (1996) have attempted to explain how a relatively large fraction of firms are thought to be in compliance with environmental regulations despite the fact that expected penalties for these violations are deemed rather low. This paper offers an alternative explanation for the interesting paradox by incorporating costly and uncertain litigation.     

Migration decisions under ambiguity: Migration distance effects revisited

There is ample evidence that distance has a strong negative effect on migration. Despite its significance in migration decisions, scholars rarely explore the migration distance effect deeper than the first level of interpretation derived from the simple neoclassical theory of migration. This study revisits the migration distance effect in the spirit of Knightian distinction between risk and uncertainty. To this end, this study attempts to construct estimates of the risk premium migrants are willing to pay to avoid the risk associated with migration distance. The results show that the magnitude of the distance effect is not rationalized by risk aversion in the Arrow–Pratt sense (Arrow, 1965, The theory of risk aversion, Yrjo Jahnssonin Saatio, Helsinki, Finland, 90; Pratt, 1964, Econometrica, 32, 122). In particular, the risk premium demanded by distant rural residents is unjustifiably higher compared with that of those living closer to urban areas in their migration decisions. The results suggest that the migration distance effect is analogous to the equity home bias puzzle and the Ellsberg paradox in that the assumption of subjective expected utility can lead to seemingly irrational human behaviors. Some of the findings in this study shed light on the role of subjective aspects such as perception, confidence, and pessimism in migration decisions, which have been neglected in the literature.     

基于外部性内部化与国家意愿支付的脱硝电价定价研究

本文从外部性内部化理论和费用效益理论出发,提出按照国家意愿支付确定脱硝电价,并在研究国家意愿支付与脱硝边际成本的变动规律基础上论证了该脱硝电价算法的合理性。接着,构建了基于国家意愿支付的脱硝电价模型,在分析2004年我国电力行业脱硝成本与脱硝环境效益的基础上,对脱硝电价进行了案例研究,对在实践上如何计算脱硝电价做了有益的尝试。     

Expected consumer’s surplus as an approximate welfare measure

Except for a knife-edge case of preferences, the percentage error from using the change in expected consumer’s surplus (ECS) to approximate the willingness to pay for a change in the distribution of a random price is unbounded, in contrast to Willig’s (Am Econ Rev 66:589–597; 1976) famous approximation result for nonrandom prices. If the change is smooth on the space of random variables, and either the initial price is nonrandom or state-contingent payments are possible, then the change in ECS locally approximates the willingness to pay well. Unfortunately, this smoothness fails in some important applications. I thank Hector Chade, Glenn Ellison, Peter Hammond, Manuel Santos, seminar participants at Arizona State, Stanford and Yale and participants of the Midwest Economic Theory meetings at Indiana University and the 2004 Summer Econometric Meetings for comments.     

A revealed-preference implication of weighted utility decisions under uncertainty

Summary. In a novel formulation of revealed preference analysis, Green and Osband [8] show that for expected-utility maximizers, acts partition the state-simplex into linear polyhedral blocks. The question naturally arises whether this characterization distinguishes expected utility theory from non-expected utility theories. This paper investigates the weighted utility theory of Chew [2] and shows that the corresponding partition is systematically different from the expected utility theory: the boundaries of the partition blocks are quadratic rather than linear. This result contains useful empirical contents. Received: May 15, 1995; revised version: November 22, 1996     

Is the Allais paradox due to appeal of certainty or aversion to zero?

Experimental Economics - We provide a novel but intuitive explanation for expected utility violations found in the Allais paradox: individuals are commonly averse to receiving nothing. We call this...     

Past and present outage costs – A follow-up study of households’ willingness to pay to avoid power outages

Households’ demand for electricity continues to increase. This trend per se should indicate increased disutility from power outages. Additionally, batteries and other back-up systems have been improved, and the frequency and duration of outages have been reduced in many countries. By comparing the results from two stated preference studies on Swedish households’ willingness to pay (WTP) to avoid power outages in 2004 and 2017, we investigate whether the WTP has changed. The WTP is assessed for power outages of 1- and 4 -h durations, and whether it is planned or unplanned. We find three main differences: (i) the proportion of households stating zero WTP to avoid power outages decreased significantly from 2004 to 2017, meaning that more households are willing to pay to avoid a power outage in 2017 than in 2004; (ii) the overall WTP was considerably higher in 2017 than in 2004, but (iii) the conditional WTP, that is, WTP for those that have a positive WTP for an outage, has decreased. These results have implications for how regulators incentivize and regulate electricity suppliers, because the results suggest that a reliable supply of electricity is of greater importance now than what the literature has suggested.     

知识权力视角下悖论式领导对研发团队创新的作用及影响机制研究

结合领导力、知识管理及创新相关理论，基于中国情境构建并检验链接悖论式领导与团队创新关系的理论模型，从知识—权力转化视角探讨悖论式领导对团队创新的作用机制及边界条件。研究得出，悖论式领导对创新团队的知识权力集中度有显著正向影响，进而通过知识创造、知识整合等阶段性过程作用于团队创新；在领导权力与知识权力的转化及承接过程中，高竞争性价值观会提升悖论式领导对知识权力集中度的作用，低竞争性价值观会削弱悖论式领导对知识权力集中度的作用。     

Upper and lower bounds for expected utility

Summary.   The decision-theoretic literature has developed very few techniques to bound the expected utility of a random variable when only simple statistics like its median or mode or mean are known. One reason for this lack of results is that we are missing a convenient way to link probability theory and expected utility. This paper is written to demonstrate a general (and genuinely probabilistic) technique to obtain upper and lower bounds for the expected utility of a lottery. Received: December 14, 1999; revised version: March 8, 2000     

The probability of conflicts in a U.S. presidential type election

Summary. In a two candidate election, it might be that a candidate wins in a majority of districts while he gets less vote than his opponent in the whole country. In Social Choice Theory, this situation is known as the compound majority paradox, or the referendum paradox. Although occurrences of such paradoxical results have been observed worldwide in political elections (e.g. United States, United Kingdom, France), no study evaluates theoretically the likelihood of such situations. In this paper, we propose four probability models in order to tackle this issue, for the case where each district has the same population. For a divided electorate, our results prove that the likelihood of this paradox rapidly tends to 20% when the number of districts increases. This probability decreases with the number of states when a candidate receives significatively more vote than his opponent over the whole country.Received: 12 August 2002, Revised: 7 March 2003, JEL Classification Numbers: D71. Correspondence to: Vincent R. MerlinSpecial thanks are due to Franck Bisson, a Caen PhD student, who helped collect the data. The authors also gratefully acknowledge Ashley Piggins and an anonymous referee for their comments.     

Consumer Capital as the Source of Happiness: The Missing Economic Theory Underlying the Income-Happiness Paradox

Self-reported happiness does not generally increase with rising income, as established by Richard Easterlin. We argue that the current debate in economics about the income-happiness paradox has paid too little attention to the theoretical foundation of the expected positive relation between income and happiness, seeking an empirical resolution through better data and more elaborate estimating equations instead. We return to the history of economics and revisit the contributions of Irving Fisher and Kenneth Boulding for the missing economic theory that underlies the income-happiness paradox. According to both Fisher and Boulding, “consumer capital” is the ultimate source of welfare, whereby consumer capital is defined as an accumulated stock of tangible and intangible instruments that yield a stream of services over their useful life. In the view of Fisher and Boulding, it is the utilization of this capital stock that renders happiness to individuals. Moreover, income that pays for the goods of consumption can be a “bad,” reflecting the cost of maintaining the consumer capital stock. Therefore, Fisher and Boulding’s insights bring a new perspective to the Easterlin paradox, showing that the empirical finding that rising income contributes only little, if anything, to levels of happiness has been overemphasized at the expense of the theoretically more relevant relation between consumer capital and happiness, and the exact role of income therein.     

When and why not to auction

Summary. Standard auctions are known to be a revenue-maximizing way to sell an object under broad conditions when buyers are symmetric and have independent private valuations. We show that when buyers have interdependent valuations, auctions may lose their advantage, even if symmetry and independence of information are maintained. In particular, simple alternative selling mechanisms that sometimes allow a buyer who does not have the highest valuation to win the object will in general increase all buyers willingness to pay, possibly enough to offset the loss to the seller of not always selling to the buyer with the greatest willingness to pay.Received: 18 June 2003, Revised: 7 September 2004, JEL Classification Numbers: D44, D82. Correspondence to: Colin M. CampbellWe thank Richard McLean, Dan Kovenock, two referees, and seminar participants at the University of Pittsburgh, Johns Hopkins University, Washington University, the Federal Communications Commission, the Institute for Advanced Studies at Princeton, UC-Santa Barbara, UC-Santa Cruz, and the Ohio State University Department of Finance for helpful suggestions. We thank the NSF for funding.