Endowment-regarding preferences

We consider a general equilibrium model of pure exchange economies with endowment externalities. Consumers’ behaviors depend not only on their own consumption but also on the endowments of the other consumers. Applying the same method of analysis in Balasko (2015) about wealth concerns, we first show that almost all properties of equilibrium, including smooth equilibrium manifold and genericity of regular economies, can be directly extended to the economy where the demand function depends on the endowments of others and wealth of only one consumer. Next, we clarify the sufficient conditions under which those properties remain true in the economy with the most general form of endowment externalities. Finally, we generalize the above sufficient conditions to derive generic regularity results in the economy with both consumption and endowment externalities.     

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.     

Perturbed utility and general equilibrium analysis

We study general equilibrium theory of complete markets in an otherwise standard economy with each household having an additive perturbed utility function. Since this function represents a type of stochastic choice theory, the equilibrium of the corresponding economy is defined to be a price vector that makes its mean expected demand equal its mean endowment. We begin with a study of the economic meaning of this notion, by showing that at any given price vector, there always exists an economy with deterministic utilities whose mean demand is just the mean expected demand of our economy with additive perturbed utilities. We then show the existence of equilibrium, its Pareto inefficiency, and the upper hemi-continuity of the equilibrium set correspondence. Specializing to the case of regular economies, we finally demonstrate that almost every economy is regular and the equilibrium set correspondence in this regular case is continuous and locally constant.     

Advantageous redistribution with three smooth CES utility functions

We present a parametric example of three-country advantageous redistribution with two Cobb–Douglas utility functions and one CES utility function for which the elasticity of substitution is 1/2. This paper indicates that the possibility of advantageous redistribution strongly depends on the three countries’ taste patterns, endowment distributions, and the elasticity of substitution. In particular, we will show with specific examples that greater difference between the donor and recipient’s taste patterns and a lower elasticity of substitution can increase the chance of advantageous redistribution.     

Generic non-existence of general equilibrium with EUU preferences under extreme ambiguity

In the presence of three or more realisations of the aggregate endowment that are extremely ambiguous, in the sense that all relative probabilities are admissible, if agents have preferences that are representable by expected uncertain utility functions (Gul and Pesendorfer, 2014), general equilibrium does not generically exist in finite economies. It always exists, however, in continuum economies.     

Universal Pareto dominance and welfare for plausible utility functions

We study Pareto efficiency in a setting that involves two kinds of uncertainty: Uncertainty over the possible outcomes is modeled using lotteries whereas uncertainty over the agents’ preferences over lotteries is modeled using sets of plausible utility functions. A lottery is universally Pareto undominated if there is no other lottery that Pareto dominates it for all plausible utility functions. We show that, under fairly general conditions, a lottery is universally Pareto undominated iff it is Pareto efficient for some vector of plausible utility functions, which in turn is equivalent to affine welfare maximization for this vector. In contrast to previous work on linear utility functions, we use the significantly more general framework of skew-symmetric bilinear (SSB) utility functions as introduced by Fishburn (1982). Our main theorem generalizes a theorem by Carroll (2010) and implies the ordinal efficiency welfare theorem. We discuss three natural classes of plausible utility functions, which lead to three notions of ordinal efficiency, including stochastic dominance efficiency, and conclude with a detailed investigation of the geometric and computational properties of these notions.     

Equilibria in large economies with a separable Banach commodity space and non-ordered preferences

The purpose of this paper is to provide an existence result of equilibria for economies with a measure space of agents, a non-trivial production sector and an infinite dimensional commodity space. The commodity space is modeled by an ordered separable Banach space whose positive cone has a non-empty interior. The discretization approach proposed in this paper, allows us to extend the existence results in Khan and Yannelis [Equilibrium in markets with a continuum of agents and commodities. In: Khan, M.A., Yannelis, N.C. (Eds.), Equilibrium Theory in Infinite Dimensional Spaces. Springer, Berlin, 1991] and Podczeck [Economic Theory 9 (1997) 585] to economies with a non-trivial production sector and with possibly non-ordered but convex preferences as well as partially ordered (possibly incomplete) but non-convex preferences.     

Nonrecursive separation of risk and time preferences

Recursive utility disentangles preferences with respect to time and risk by recursively building up a value function of local increments. This involves certainty equivalents of indirect utility. Instead we disentangle preferences with respect to time and risk by building up a value function as a non-linear aggregation of certainty equivalents of direct utility of consumption. This entails time-consistency issues which are dealt with by looking for an equilibrium control and an equilibrium value function rather than a classical optimal control and a classical optimal value function. We characterize the solution in a general diffusive incomplete market model and find that, in certain special cases of utmost interest, the characterization coincides with what would arise from a recursive utility approach. But also importantly, in other cases, it does not: The two approaches are fundamentally different but match, exclusively but importantly, in the mathematically special case of homogeneity of the value function.     

The structure of strategy-proof random social choice functions over product domains and lexicographically separable preferences

We characterize the class of dominant-strategy incentive-compatible (or strategy-proof) random social choice functions in the standard multi-dimensional voting model where voter preferences over the various dimensions (or components) are lexicographically separable. We show that these social choice functions (which we call generalized random dictatorships) are induced by probability distributions on voter sequences of length equal to the number of components. They induce a fixed probability distribution on the product set of voter peaks. The marginal probability distribution over every component is a random dictatorship. Our results generalize the classic random dictatorship result in Gibbard (1977) and the decomposability results for strategy-proof deterministic social choice functions for multi-dimensional models with separable preferences obtained in LeBreton and Sen (1999).     

Testing how information about cost-effectiveness,cause preferences,and geographic preferences interact to affect philanthropic giving

The broad instrumental philanthropy movement advocates for considerations of cost-effective impact in donation decisions. Within that broader movement, the effective altruism movement goes as far as to advocate for cause neutrality and geographic neutrality when prioritizing cost-effectiveness in charity. We present a survey experiment that examined how information about cost-effectiveness, cause area preferences, and geographic preferences interact to affect philanthropic giving. The experiment varied these three dimensions in a hypothetical giving situation and found that cost-effectiveness information had the strongest influence on hypothetical giving. Participants gave most when presented with charities that were shown to be highly cost-effective, local/domestic, and that matched their preferred cause area. Understanding how these three considerations interact to affect donors is important as donors continue to desire more information about the cost-effective impact of their donation.     

Asset prices in an exchange economy when agents have heterogeneous homothetic recursive preferences and no risk free bond is available

We study a pure exchange economy under incomplete markets where households have heterogeneous homothetic recursive preferences and lending and borrowing are precluded. We fully characterize the properties of the efficient allocations and the equilibrium asset price. The ownership distribution dynamics reveal the emergence of a dominant agent, who after some finite time, remains the only investor that increases asset holdings until asymptotically owning the entire wealth. Investors can be ranked according to a unique parameter that aggregates agents’ preference characteristics and we show how time discount rate, attitude towards risk and intertemporal substitution contribute to capital accumulation.     

Time-inconsistent preferences and time-inconsistent policies

Social security is commonly viewed as a commitment device for hyperbolic consumers. We argue that such common intuition is not consistent with formal economic theory. In a model where the government can choose either time-consistent or time-inconsistent policies to govern its social security arrangement and credit markets are complete, only a time-inconsistent policy achieves true commitment by hyperbolic consumers. This rules out a traditional social security program as a commitment device.     

Uncertain equilibria and incomplete preferences

This paper studies the tendency for incomplete preference structures to be associated with equilibrium price indeterminacies in an Arrow–Debreu–McKenzie state-contingent setting. It is shown that the presence of a sufficiently smooth stochastic production technology is inconsistent with equilibrium price indeterminacies even if all individuals have incomplete preference structures. A particularly convenient characterization of Paretian equilibria in the presence of incomplete preferences, which allows Paretian equilibrium to be characterized using simple principles of convex optimization and (sub)differential analysis, is also developed.     

Representation of transferable utility games by coalition production economies

We prove that, by the method of construction of a coalition production economy due to Sun et al. [Sun, N., Trockel, W., Yang, Z., 2008. Competitive outcomes and endogenous coalition formation in an n$n$-person game. Journal of Mathematical Economics 44, 853–860], every transferable utility (TU) game can be generated by a coalition production economy. Namely, for every TU game, we can construct a coalition production economy that generates the given game. We briefly discuss the relationship between the core of a given TU game and the set of Walrasian payoff vectors for the induced coalition production economy.     

Turnpike property and convergence rate for an investment model with general utility functions

In this paper we aim to address two questions faced by a long-term investor with a power-type utility at high levels of wealth: one is whether the turnpike property still holds for a general utility that is not necessarily differentiable or strictly concave, the other is whether the error and the convergence rate of the turnpike property can be estimated. We give positive answers to both questions. To achieve these results, we first show that there is a classical solution to the HJB equation and give a representation of the solution in terms of the dual function of the solution to the dual HJB equation. We demonstrate the usefulness of that representation with some nontrivial examples that would be difficult to solve with the trial and error method. We then combine the dual method and the partial differential equation method to give a direct proof to the turnpike property and to estimate the error and the convergence rate of the optimal policy when the utility function is continuously differentiable and strictly concave. We finally relax the conditions of the utility function and provide some sufficient conditions that guarantee the turnpike property and the convergence rate in terms of both primal and dual utility functions.     

Threshold preferences and the environment

In this article we study the implication of thresholds in preferences. To model this we extend the basic model of John and Pecchenino (1994) by allowing the current level of environmental quality to have a discrete impact on how an agent trades off future consumption and environmental quality. Thus, we endogenize the semi-elasticity of utility based on a step function. We find that for low (high) thresholds, environmental quality converges to a low (high) steady state. For intermediate levels it converges to a stable p-cycle, with environmental quality being asymptotically bounded below and above by the low and high steady state. As policy implications we study shifts in the threshold. Costless shifts of the threshold are always worthwhile. If it is costly to change the threshold, then it is worthwhile to change the threshold if the threshold originally was sufficiently low. Lump-sum taxes lead to a development trap and a proportional income tax should be preferred.     

Equilibria in a large production economy with an infinite dimensional commodity space and price dependent preferences

We prove the existence of a competitive equilibrium in a production economy with infinitely many commodities and a measure space of agents whose preferences are price dependent. We employ a saturated measure space for the set of agents and apply recent results for an infinite dimensional separable Banach space such as Lyapunov’s convexity theorem and an exact Fatou’s lemma to obtain the result.     

Accounting for optimism and pessimism in expected utility

We provide a preference foundation for decision under risk resulting in a model where probability weighting is linear as long as the corresponding probabilities are not extreme (i.e., 0 or 1). This way, most of the elegance and mathematical tractability of expected utility is maintained and also much of its normative foundation. Yet, the new model can accommodate the extreme sensitivity towards changes from 0 to almost impossible and from almost certain to 1 that has widely been documented in the experimental literature. The model can be viewed as “expected utility with the best and worst in mind” as suggested by Chateauneuf, Eichberger and Grant (Chateauneuf, Alain, Eichberger, Jürgen, Grant, Simon, 2007. Choice under uncertainty with the best and worst in mind: NEO-Additive capacities. Journal of Economic Theory 137, 538–567) or, following our preference foundation, interpreted as “expected utility with consistent optimism and pessimism”.     

Dynamic theory of preferences: Habit formation and taste for variety

We analyze individual preferences over infinite horizon consumption choices. Our axioms provide the foundation for a recursive representation of the utility function that contains as particular cases the classical Koopmans representation (Koopmans (1960)) as well as the habit formation specification.We examine some of the consequences of our axiomatization by considering a standard consumer choice problem, and show that typically in the space of concave utility functions satisfying our axioms the consumer displays a taste for variety. The latter means that such a consumer selects optimally time variant consumption programs for any given time invariant sequence of commodities’ relative prices and for all possible sequences of market discount factors. In contrast, if a concave utility function satisfies Koopmans’ axioms the consumer does not display a taste for variety.