Revealed favorability,indirect utility,and direct utility

This paper studies the axiomatic foundations of the indirect utility function, based upon a revealed preference approach. A chain of comparisons of budgets is regarded as giving a relation on the price-income space (a revealed favorability relation) rather than a relation on the commodity space (a revealed preference relation). The weak and strong axioms of revealed favorability are introduced by analogy with the weak and strong axioms of revealed preference, and the relationship between the former two axioms is investigated. The indirect and direct utility functions are then derived on the basis of the strong axiom of revealed favorability. Neither the continuity property of the demand function nor the convex property of its range is required for the approach taken in the paper.     

Subjective ambiguity, expected utility and Choquet expected utility

Summary. Using the Savage set up, this paper provides a simple axiomatization of the Choquet Expected Utility model where the capacity is an inner measure. Two attractive features of the model are its specificity and the transparency of its axioms. The key axiom states that the decision-maker uses unambiguous acts to approximate ambiguous ones. In addition, the notion of ‘ambiguity’ is subjective and derived from preferences. Received: March 23, 2000; revised version: April 24, 2001     

Technology clubs,technology gaps and growth trajectories

This paper looks at the convergence clubs literature from a Schumpeterian perspective, and it follows the idea that cross-country differences in the ability to innovate and to imitate foreign technologies determine the existence of clustering, polarization and convergence clubs. The study investigates the characteristics of different technology clubs and the growth trajectories that they have followed over time. The cross-country empirical analysis first explores the existence of multiple regimes in the data by means of cluster analysis techniques. It then estimates a technology-gap growth equation in a dynamic panel model specification. The empirical results identify three distinct technology clubs, and show that these are characterized by remarkably different technological characteristics and growth behavior.     

Measuring the natural rates,gaps, and deviation cycles

One definition of the natural rate is the (time-varying) steady state equilibrium rate. Then the gap is the difference between the actual and natural rates, or the forecastable movement. Although modern business cycle theories study deviation cycles (cycles in the gap), the NBER business cycle reference dates measure classical cycles (cycles in the actual rate) in the US. Measuring deviation cycles requires detrending, and this motivated the invention of the Beveridge–Nelson (B–N) decomposition. This paper considers multivariate detrending, and proposes a Bayesian approach to the multivariate B–N decomposition. An application of the method to US data gives (i) a joint estimate of the natural rates and gaps of output, inflation, interest, and unemployment with reliable error bands, and (ii) the posterior probabilities of positive gap, recession, and revival. These results may help us to identify the four phases of deviation cycles: expansion, recession, contraction, and revival.     

Market clearing, utility functions, and securities prices

Summary. We prove the existence of equilibrium in a continuous-time finance model; our results include the case of dynamically incomplete markets as well as dynamically complete markets. In addition, we derive explicitly the stochastic process describing securities prices. The price process depends on the risk-aversion characteristics of the utility function, as well as on the presence of additional sources of wealth (including endowments and other securities). With a single stock, zero endowment in the terminal period, and Constant Relative Risk Aversion (CRRA) utility, the price process is geometric Brownian motion; in essentially any other situation, the price process is not a geometric Brownian motion.JEL Classification Numbers: D52.This paper is part of my Dissertation (UC Berkeley). I am very grateful to my advisor Professor Robert M. Anderson. I also would like to thank Steve Evans, Roger Purves, Jacob Sagi, Chris Shannon and the participants of the 2002 NBER General Equilibrium Conference at the University of Minnesota (Minneapolis) for very helpful discussions and comments. This work was supported by Grant SES-9710424 from the National Science Foundation.     

Private information, transferable utility, and the core

We consider transferable-utility, cooperative games, featuring differently informed players. Parties can exchange endowments or undertake joint production, but not pool information. Coalitional contracts must therefore comply with members’ private information. Qualitatively different shadow prices then arise: some for material endowments, others for knowledge. We focus on computable core solutions, generated by shadow prices. Such solutions obtain under standard regularity assumptions.     

Fiscal policy,wealth divergence,and lifetime utility

Using a two-country dynamic optimization model where the less patient country decumulates and the more patient one accumulates wealth, we analyze spillover effects of lump-sum and consumption taxes. A lump-sum tax on a country definitely harms the other country through a change in the rate of interest. A lump-sum tax on either country always improves the less patient country's asset position. A consumption tax has no spillover effect, although it is Pareto-inferior. Applying these results into a closed-country context with heterogeneous agents, we also discuss policy implications of a discriminatory tax.     

Correlated risks,bivariate utility and optimal choices

In this paper, we consider a decision-maker facing a financial risk flanked by a non-financial background risk such as health or environmental risk. A decision has to be made about the amount of an investment (in the financial dimension) resulting in a future benefit either in the same dimension (savings) or in the other dimension (environmental quality or health improvement). In this framework, we study the impact of the correlation between the two risks on optimal choices. In the saving problem, we find conditions ensuring that positive correlation between the two risks implies that the optimal amount of savings increases. These conditions involve specific requirements on the direct and cross derivatives of the two-argument utility function. Similarly, we find a different and specific set of conditions ensuring that the same conclusion on optimal investment for health (environmental) improvement is reached. The two sets of conditions determined support the conclusion that the signs of the derivatives of the two-argument utility function should alternate.     

Persistent gaps and default traps

We show how vicious circles in countries' credit histories arise in a model where output persistence is coupled with asymmetric information about output shocks. In such an environment, default signals the borrower's vulnerability to adverse shocks and creates a pessimistic growth outlook. This translates into higher interest spreads and debt servicing costs relative to income, raising the cost of future repayments, thereby creating “default traps”. We build a long and broad cross-country dataset to show the existence of a history-dependent “default premium” and of significant effects of output persistence on sovereign creditworthiness, consistent with the model's predictions.     

Education reform and education gaps

We estimate the causal effect of the Italian 2009 “Gelmini” education reform on four academic performance gaps relating to immigration status, gender, parental social status, and parental education. The reform led to a reduction in the number of teachers and an increase in class size. Lags in implementing the reform for different grades is used to specify a difference-in-difference identification strategy. We find that the reform had a statistically and economically significant effect on the immigrant-native gap and on the gender gap, but not on the gap between students with more and less favourable family background. Particularly, our findings show that students with an immigration background were the main losers from the Gelmini reform.     

Tournaments with gaps

A standard tournament contract specifies only tournament prizes. If agents’ performance is measured on a cardinal scale, the principal can complement the tournament contract by a gap which defines the minimum distance by which the best performing agent must beat the second best to receive the winner prize. We analyze a tournament with two risk averse agents. Under unlimited liability, the principal strictly benefits from a gap by partially insuring the agents and thereby reducing labor costs. If the agents are protected by limited liability, the principal sticks to the standard tournament.     

Turnpike theory, discounted utility, and the von Neumann facet

The convergence of infinite optimal paths to stationary optimal paths is proved in models of capital accumulation whose discount factors are near 1, where strict concavity is not required for utility functions and production functions. The critical assumptions are unique support prices for points of the von Neumann facet, where is near 1, a unique optimal stationary stock when is equal to 1, and the absence of cyclic paths on the von Neumann facet when is equal to 1. The results are illustrated in generalizing a model provided by Weitzman and Samuelson.     

Dilution costs,underinvestment, and utility regulation under asymmetric information

This article addresses the problem faced by a regulated natural monopolist who must raise outside funds to finance socially desirable projects. We demonstrate that fair rate of return utility price regulation will lead to underinvestment incentives in the presence of asymmetric information between the firm and the capital markets regarding the firm's assets and future costs. This problem is especially severe when financing choice is restricted to equity. Underinvestment can be either completely eliminated by adjusting the allowed rate of return above the fair rate or reduced by switching to debt finance.Support from the Center for the Study of Regulated Industry at Georgia State University is gratefully acknowledged. We have benefited from the comments of Victor Andrews, two anonymous reviewers, and the editor, Michael A. Crew. The usual disclaimer applies.     

Equally-distributed equivalent utility,ex post egalitarianism and utilitarianism

We provide an axiomatization of expected equally-distributed equivalent-utility social welfare functions in the context of Harsanyi?s impartial observer theorem. For this family of social welfare functions, we show what additional axiom is necessary and sufficient for the observer to exhibit aversion to ex post inequality. We also relate this axiomatization to our axiomatization in a companion paper of generalized utilitarian social welfare functions. Given certain richness assumptions, the only social welfare functions that belong to both families are the utilitarian.     

Growth trends, cyclical fluctuations, and welfare with non-expected utility preferences

Using standard time-separable, discounted expected utility (EU) models, Lucas (Models of Business Cycles, 1987) and others argue that growth trends have a crucial, and cyclical fluctuations a trivial, effect on individuals' utility. These conclusions are drastically altered if, instead, non-EU preferences are assumed.     

Gender preference gaps and voting for redistribution

Experimental Economics - There is substantial evidence that women tend to support different policies and political candidates than men. Many studies also document gender differences in a variety of...     

Additive utility

Summary We put the theory of cardinal and additive utilities on the same kind of simple foundation as the theory of ordinal utility. We give necessary and sufficient conditions for preferences to have continuous cardinal or additive utility functions, on connected topological spaces. Basing our proofs on fundamental algebraic theorems yields new techniques that allow us to give simple proofs of earlier results (cf. [4, 14] and to provide a basis for new results [10].The assistance of the National Science Foundation, Grant SES-8510620, is gratefully acknowledged.     

Stipulated settlements,the consumer advocate and utility regulation in Florida

US utility regulation is evolving. Negotiated or stipulated settlements have begun to replace or supplement litigation, but relatively little seems to be known about this practice. This paper presents evidence from Florida. During 1976–2002, 30% of earnings reviews were settled by stipulations involving the Office of Public Counsel but only 7% of company requests. The mean value of a rate reduction was eight times larger with a stipulation than without; the median value was more than 50 times larger. Over three quarters of the rate reductions associated with earnings reviews derived from these stipulations; excluding one exceptional case the proportion was 94%. Sanford Berg and Paul Sotkevitz kindly briefed me on stipulations and introduced me to the Florida Public Service Commission. I am particularly indebted to Dale Mailhot of the Commission for explaining the regulatory processes, allowing me access to the database, and patiently clarifying the details and background. I am grateful to Bonnie Davis, Jack Shreve and Scheff Wright for enlightening discussions in Tallahassie; to Dan Fessler and Steven Weissman for discussion of this topic in California; to Ashley Brown, Robert Burns, Joseph Doucet, Guy Holburn, Mark Jamison, Paul Joskow, Paul Sotkevitz, Pablo Spiller and James Wilson for related discussion and comments; and to two referees for helpful suggestions. I thank the Judge Business School and the TSEC grant to the Electricity Policy Research Group at Cambridge University for facilitating this research. None of the above is responsible for views expressed herein. Some outline results of the early research were given in Littlechild (2003). For more detail on the topics of this paper see the working paper Littlechild (2006).