re examination of uniform commodity taxes under a non linear income tax system and its implication for production efficiency abstract this paper shows that the result of uniform commodity tax under nonlinear income taxation by atkinson and stiglitz 1976 no longer holds if the production side of an economy is taken into the consideration in particular imposing a non uniform commodity tax can pareto improve welfare even under nonlinear income taxation in addition the paper shows that if the government uses a nonlinear income tax system for income redistribution then the introduction of distortions in the public sector can pareto improve welfare contrary to the results in diamond and mirrlees 1971

economic dynasties with intermissions we consider a model of successive generations with a fixed proportion of selfish and altruistic members in each individual s offspring in contrast with the others selfish members bequeath nothing to their own children we assume that parents cannot recognize their heirs types and that negative bequests are forbidden we study markov perfect equilibria of this multistage game of incomplete information and their implications for wealth distribution

producer decision making under uncertainty role of past experiences and question framing limited research examines the role of reference points or how uncertain outcomes are processed in producer decisions this study employs a survey containing a split sample choice experiment varying how uncertain outcomes are portrayed and assesses multiple candidate reference points results suggest that u s cattle producers use the best outcome experienced as reference points in their decisions and the method by which uncertain outcomes are presented impacts loss aversion marginal willingness to pay and market participation estimates this illustrates how research employing split samples multiple reference points and alternative methods of portraying uncertain outcomes may better identify producer decision making

on optimal non linear taxation and public good provision in an overlapping generations economy abstract using the self selection approach to tax analysis within an olg framework the paper examines optimal non linear labour and capital income taxation and the provision of a durable public good under endogenous wages the marginal tax rules depend on the influence of the tax instruments on self selection and on the income earning abilities of the households in particular we found that production inefficiency occurs in the model justifying capital income taxation for the public good the paper derives a dynamic analogue of the second best samuelson rule encompassing both inter and intragenerational redistributive considerations furthermore the usual conditions guaranteeing the efficiency of the first best samuelson rule are not sufficient in the present model

am i getting a good deal reference dependentdecision making when the reference price is uncertain models of consumer decision making commonly incorporate reference dependent preferences in these models the reference point is typically assumed to be known by the consumer however research on price recall and the reference formation process reveals that the reference price is often uncertain at the time of purchase reference price uncertainty creates ambiguity for the consumer about whether they are getting a good or bad deal this paper develops a model of consumer choice in the presence of reference dependent preferences when the reference price is uncertain data from two empirical studies that vary the product category and order of the elicitation of reference prices show that the new model generally outperforms conventional discrete choice models that either ignore reference prices or treat reference prices as certain the new model provides insights into the effect of reducing reference price uncertainty on consumer choice and reveals that high uncertainty smoothes the kink in the demand curve that is present in traditional reference price demand models

public versus private investment in human capital endogenous growth and income inequality in this paper we present an overlapping generations model with heterogeneous agents in which human capital investment through formal schooling is the engine of growth we use simple functional forms for preferences technologies and income distribution to highlight the distinction between economies with public education and those with private education we find that income inequality declines more quickly under public education on the other hand private education yields greater per capita incomes unless the initial income inequality is sufficiently high we also find that societies will choose public education if a majority of agents have incomes below average

a reference price theory of the endowment effect abstract the common finding that selling prices exceed buying prices the so called endowment effect is typically explained by the assumptions that consumers evaluate potential transactions with respect to their current holdings and that the owners of a good regard its potential loss to be more significant than nonowners regard its potential acquisition in contrast to this pain of losing account the authors propose that the endowment effect reflects a reluctance to trade on terms that appear unfavorable with respect to salient reference prices in six experiments and eight more summarized in appendixes the authors show that manipulations that reduce the gap between valuations and reference prices reduce or eliminate the endowment effect these results suggest that the endowment effect is often best construed as an aversion to bad deals rather than an aversion to losing possessions

consumer normal price estimation market versus personal standards in reference price models internal reference price is typically estimated from actual market prices given the generally poor price knowledge consumers have exhibited in prior research the question is whether it is reasonable to use actual market prices to estimate consumers internal reference price standards the initial answer provided in this research surprisingly is yes although internal reference prices are measurable and do affect consumer price perception the gains in measuring and using those standards in predicting brand choice for frequently purchased products may not be worth the costs reasons why the surrogate price measure may work and implications for the measurement of internal reference price standards are considered

looking for loss aversion in scanner panel data the confounding effect of price response heterogeneity recent work in marketing has drawn on behavioral decision theory to advance the notion that consumers evaluate attributes and therefore choice alternatives not only in absolute terms but asdeviations from a reference point the theory has important substantive and practical implications for the timing and execution of price promotions and other marketing activities choice modelers using scanner panel data have tested for the presence of these reference effects in consumer response to an attribute such as price in applications of the theory of reference dependent choice tversky and kahneman 1991 some modelers report empirical evidence of loss aversion when a consumer encounters a price above his or her established reference point a loss the response is greater than for a price below the reference point a gain researchers have gone so far as to suggest that evidence for the so called reference effect make it an empirical generalization in marketing e g kalyanaram and winer 1995 meyer and johnson 1995 it is our contention that the measurement of loss aversion in empirical applications of the reference dependent choice model is confounded by the presence of unaccounted for heterogeneity in consumer price responsiveness our reasoning is that the kinked price response curve implied by loss aversion is confounded with the slopes of the response curves across segments that are differentially responsive to price a more price responsive consumer with a steeper response function tends to have a lower price level as a reference point this consumer faces a larger proportion of prices above his reference point thus the response curve is steeperin the domain of losses similarly the less price responsive consumer sees a greater proportion of prices below his reference point so the response curve is less steep within the domain of gains as a result any cross sectional estimate of loss aversion that does not take this into account will be biased upward researchers who do not control for heterogeneity in price responsiveness may arrive at incorrect substantive conclusions about the phenomenon it is interesting to note that in this instance failure to control for heterogeneity induces a bias infavor of finding an effect rather than the more typical case of attenuation of the effect toward zero we first test our assertion regarding the referencedependent model using scanner panel data on refrigerated orange juice and subsequently extend this analysis to 11 additional product categories in all cases we find as predicted that accounting for price response heterogeneity leads to lower and frequently nonsignificant estimates of loss aversion we do however find some categories in which the effect does not disappear altogether we also estimate loss aversion using a sticker shock model of brand choice in which the reference prices arebrand specific in line with the results of the majority of prior literature we find smaller and insignificant estimates of loss aversion in this model we show that this is because in the sticker shock model there is no apparent correlation between the price responsiveness of the consumer and the representation of reference effects as losses or gains our findings strongly suggest that loss aversion may not in fact be a universal phenomenon at least in the context of frequently purchased grocery products

testing models of consumer search using data on web browsing and purchasing behavior using a large data set on web browsing and purchasing behavior we test to what extent consumers are searching in accordance to various classical search models we nd that the benchmark model of sequential search with a known distributions of prices can be rejected based on the recall patterns we observe in the data moreover we show that even if consumers are initially unaware of the price distribution and have to learn the price distribution observed search behavior for given consumers over time is more consistent with non sequential search than sequential search with learning our

are food choices really habitual integrating habits variety seeking and compensatory choice in a utility maximizing framework given the large number of food choices that consumers make each day it seems likely that they will adopt decision strategies that minimize cognitive effort to examine this issue we develop a conceptual and empirical model of habitual choice and the factors that result in transitions to two strategies other than habitual selection utility maximizing choice and a variety seeking strategy our approach provides an alternative to traditional state dependence methods used in this type of panel data we apply this framework to the choice of two food products that illustrate the heterogeneity across types of products in decision strategies and routine choice patterns copyright 2013 oxford university press

modeling loss aversion and reference dependence effects on brand choice based upon a recently developed multiattribute generalization of prospect theory s value function tversky and kahneman 1991 we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points and that consumers weigh losses from a reference point more than equivalent sized gains loss aversion we sketch implications of this model for understanding brand choice we develop a multinomial logit formulation of a reference dependent choice model calibrating it using scanner data in addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model the model s coefficients demonstrate significant loss aversion as hypothesized we also discuss the implications of a reference dependent view of consumer choice for modeling brand choice demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics and examine other implications for competitive strategy

expectations as endowments evidence on reference dependent preferences from exchange and valuation experiments while evidence suggests that people evaluate outcomes with respect to reference points little is known about what determines them we conduct two experiments that show that reference points are determined at least in part by expectations in an exchange experiment we endow subjects with an item and randomize the probability they will be allowed to trade subjects that are less likely to be able to trade are more likely to choose to keep their item in a valuation experiment we randomly assign subjects a high or low probability of obtaining an item and elicit their willingness to accept for it the high probability treatment increases valuation of the item by 20 30 copyright 2011 oxford university press

research note estimating heterogeneous price thresholds a brand choice model with heterogeneous price threshold parameters is used to investigate a three regime piecewise linear stochastic utility function the model is used to explore the relationships between aspects of consumer price sensitivity and price thresholds using hierarchical bayes modeling with the markov chain monte carlo mcmc method this study contributes to the modeling literature on discontinuous likelihoods in choice models the empirical application using our scanner panel data set shows that the reference effect and loss aversion are more marked after price thresholds are taken into heterogeneous price response models furthermore loss aversion is attenuated by using price thresholds than by an aggregate homogeneity model without price thresholds

empirical generalizations from reference price research considerable theoretical justification for consumers use of psychological reference points exists from the research literature from a managerial perspective one of the most important applications of this concept is reference price an internal standard against which observed prices are compared in this paper we propose three empirical generalizations that are well supported in the marketing literature first there is ample evidence that consumers use reference prices in making brand choices second the empirical results on reference pricing also support the generalization that consumers rely on past prices as part of the reference price formation process third consistent with other research on loss aversion consumers have been found to be more sensitive to losses i e observed prices higher than reference prices than gains we also propose topics for further research on reference prices

how closely do hypothetical surveys and laboratory experiments predict field behavior we compare the ability of three preference elicitation methods hypothetical choices nonhypothetical choices and nonhypothetical rankings and three discrete choice econometric models the multinomial logit mnl the independent availability logit ial and the random parameter logit rpl to predict actual retail shopping behavior in three different product categories ground beef wheat flour and dishwashing liquid overall we find a high level of external validity our specific results suggest that the nonhypothetical elicitation approaches especially the nonhypothetical ranking method outperformed the hypothetical choice experiment in predicting retail sales we also find that the rpl can have superior predictive performance but that the mnl predicts equally well in some circumstances experiment

willingness to pay compensating variation and the cost of commitment hicksian welfare theory is static in nature but many decisions are made in a dynamic environment we present a dynamic model of an agent s decision to purchase or sell a good under the realistic conditions of uncertainty irreversibility and learning over time her willingness to pay wtp contains both the intrinsic value of the good as in hicksian theory plus a commitment cost associated with delaying to obtain more information the hicksian equivalence between wtp willingness to accept wta and compensating and equivalent variations no longer holds the wtp and wta divergence may arise and observed wtp values are not always appropriate for welfare analysis jel d60 d83

towards a theory of the direct indirect tax mix despite the fact that all developed economies levy broadly based indirect taxes alongside direct taxes little theory is devoted to explaining the direct indirect tax mix our purpose is to show that if different taxes have different evasion characteristics some optimal tax mix emerges naturally assuming that only income tax can be evaded and focusing on a two class economy we analyse the case for supplementing optimal non linear income taxation with commodity taxation and we develop conditions under which the latter should or should not be uniform

stated and revealed preferences for organic and cloned milk combining choice experiment and scanner data the u s food and drug administration s recent announcement that milk from cloned cows is as safe to drink as that from conventionally bred cows prompted interest among farmers food retailers and regulators in the market impacts of the introduction of milk from clones because milk from cloned animals is not currently labeled in the market we utilized a stated preference experiment to determine consumer preferences for the attribute but also sought to determine whether the survey based choices were consistent with people s revealed preferences given by scanner data our analysis indicates that a pooled model combining stated and revealed preference data exhibits overall better out of sample prediction performance than either data set used alone results from the pooled model indicate that consumers are willing to pay large premiums to avoid milk from cloned cows an amount that is over three times that for organic or rbst free milk the results are used to calculate the value of a mandatory labeling program

direct versus indirect taxation the design of the tax structure revisited this article studies the optimal direct indirect tax mix problem when individuals differ in several unobservable characteristics productivity and endowments it presents general expressions for the optimal commodity tax rates and proves that contrary to atkinson and stiglitz s 1976 result differential commodity taxation remains a useful instrument of tax policy even if preferences are separable between labor and produced goods when cross substitution effects are zero the expressions resemble traditional many households ramsey rules in a cobb douglas illustration where endowments differ only in good 1 interpreted as wealth the tax on good 2 provides an indirect way to tax the unobservable wealth

an empirical analysis of latitude of price acceptance in consumer package goods scanner panel data analyses for sweetened and unsweetened drink categories with four brands in each support the presence of a region of price insensitivity around a reference price the analyses also suggest that consumers with higher average reference price have a wider latitude of price acceptance consumers with a higher frequency of purchase i e shorter average interpurchase time interval are found to have a narrower latitude of price acceptance because they are more aware of the range of price distributions finally consumers with a higher average brand loyalty have a wider latitude of price acceptance demonstrating greater tolerance of price fluctuations

choice experiments are not conducted in a vacuum the effects of external price information on choice behavior abstract consumers carry a wealth of external knowledge and experience into a study that may affect choices in even the most well crafted experiment we derive a conceptual model showing how the level and variability of price perceptions outside the task at hand might affect choice behavior and we conduct an experiment to test the model by manipulating information provided to respondents in a way to alter the outside the experiment perceptions mixed logit error component models show that reference dependent models best describe the choice data and we find that consumer choice is significantly affected by the experiment manipulations the predictions of the model are borne out in the data as expected price sensitivity is generally higher for price changes above a price reference point than below also as predicted exogenously increasing external reference prices and exogenously reducing the variability in references prices both serve to increase the probability of making a purchase and reduce the probability of choosing none these results have important implications for the design and practice of choice experiments as they show that consumer choice is affected by perceptions of the level and variability of prices outside the experiment more generally the results highlight the need to understand the formation and distribution of reference prices when predicting consumer choice

a comparative analysis of reference price models the effect of reference price on brand choice decisions has been well documented in the literature researchers however have differed in their conceptualizations and therefore in their modeling of reference price in this article we evaluate five alternative models of reference price of which two are stimulus based i e based on information available at the point of purchase and three that are memory based i e based on price history and or other contextual factors we calibrate the models using scanner panel data for peanut butter liquid detergent ground coffee and tissue to account for heterogeneity in model parameters we employ a latent class approach and select the best segmentation scheme for each model the best model of reference price is then selected on the basis of fit and prediction as well as on the basis of parsimony in cases where the fits of the models are not very different in all four categories we find that the best reference price model is a memory based model namely one that is based on the brand s own price history in the liquid detergent category however we find that one of the stimulus based models namely the current price of a previously chosen brand also performs fairly well we discuss the implications of these findings

using cumulative prospect theory to explain anomalous crop insurance coverage choice farmers decisions about how much crop insurance to buy are not generally consistent with expected utility maximization taking into account both marginal risk benefits and marginal subsidy effects suggests that most farmers have chosen lower coverage levels than would be predicted by standard models by modeling financial outcomes as gains and losses cumulative prospect theory offers an alternative framework to perhaps better understand farmers purchase decisions the role of the reference point that defines outcomes as either a gain or a loss the degree of loss aversion curvature of the value function and the probability weighting function in determining optimal crop insurance coverage levels are explored for three representative farms calibrated to 2009 conditions loss aversion and how crop insurance is framed through choice of the reference point are shown to be the key factors that determine whether predictions from prospect theory are consistent with observed crop insurance coverage choices when crop insurance is framed as a tool to manage farm risk then optimal choices under prospect theory are not consistent with observed choices if crop insurance is framed as a stand alone investment where a loss is felt if the indemnity received is less than the premium paid then prospect theory can generate optimal coverage level choices that are largely consistent with observed decisions this result is shown to be robust to changes in parameterizations as long as loss aversion is maintained and if curvature of the value function is accompanied by decision weights that overweight low probability outcomes

uncertainty optimal taxation and the direct versus indirect tax controversy this paper examines how the presence of uncertainty affects the design of tax policy when both indirect taxes and a general income tax are available to the government there are two categories of goods the consumption levels in one group are committed to before the resolution of uncertainty and those of the other after the paper proves that contrary to a b atkinson and j e stiglitz s 1976 result differential commodity taxation remains a useful instrument of optimal tax policy even if preferences are separable between labor and produced goods copyright 1995 by royal economic society

between preferences and references asymmetric price elasticities and the simulation of fiscal policies abstract canonical demand studies and fiscal policy simulations rest on the assumption that consumers react symmetrically to price increases and decreases such assumption has been challenged from both the empirical and theoretical points of view we propose theoretically consistent empirical specifications to estimate discrete choice models random utility dcm and continuous demand systems easi and aids demand systems that allow for reference prices and asymmetric own and cross price demand response our application focuses on the demand for sugar sweetened beverages in great britain using transaction level household purchase data and different product aggregation levels we find substantial evidence of asymmetric consumer response and loss aversion with a stronger response when prices rise above their reference level our results hold for both dcms on highly differentiated products and demand systems on aggregate product categories and are robust to alternative model and reference price specifications simulations of taxes and subsidies on soft drinks shows that ignoring asymmetry may lead to biases especially when predicting price cuts

an empirical analysis of internal and external reference prices using scanner data single source yogurt data are used to examine whether both internal and external reference prices affect purchase decisions internal reference prices are memory resident prices based on actual fair or other price concepts external reference prices are observed stimuli such as regular prices that stores may display along with a sale price for comparability discrete choice models with variables representing the two types of reference prices are estimated and both types of variables are found to have significant effects on purchase probabilities this suggests that consumers may use multiple reference points in evaluating price in purchase decisions in addition a model using an indicator of a sale price discount explains purchase probabilities as well as one that models the actual discount which suggests that consumers may be reacting to the indication of savings rather than to the amount of the discount

a control function approach to endogeneity in consumer choice models abstract endogeneity arises for numerous reasons in models of consumer choice it leads to inconsistency with standard estimation methods that maintain independence between the model s error and the included variables the authors describe a control function approach for handling endogeneity in choice models observed variables and economic theory are used to derive controls for the dependence between the endogenous variable and the demand error the theory points to the relationships that contain information on the unobserved demand factor such as the pricing equation and the advertising equation the authors approach is an alternative to berry levinsohn and pakes s 1995 product market controls for unobserved quality the authors apply both methods to examine households choices among television options including basic and premium cable packages in which unobserved attributes such as quality of programming are expected to be correlated with price without correcting for endogeneity aggregate d

differentiated price loss aversion in destination choice the effect of tourists cultural interest abstract this article looks into the differentiated effects of loss aversion depending on whether individuals show cultural interest when choosing a destination based on the fact that perceived value implies not only sacrifices but also the expectations of a certain level of quality and prospects of satisfaction together with the idea the prospect theory applies to tourism prices the article states the hypothesis that interest in culture when choosing a destination lowers people s loss aversion by incorporating the reference dependent model into a multinomial logit model with random parameters which controls for heterogeneity the empirical application shows that culture interested tourists are less loss averse i e the negative effect of finding a higher than expected price diminishes with cultural interest the expectation of enjoyment of these attributes and the more conscious attitude toward maintenance restoration activities of cultural sites are hypothesized to lead prices to be evaluated differently when selecting a destination

an investigation of reference price segments abstract empirical research on reference price has typically assumed that consumers use either an internal reference price irp or an external reference price erp but not both in brand choice decisions in this article the authors assume that consumers use both irp and erp but may consider one of them more salient than the other the authors develop a model that segments consumers on the basis of the differences in the importance they assign to each type of reference price as well as in their brand preferences and responses to marketing mix variables the authors calibrate the model on data for four categories liquid detergents ketchup tissue and yogurt in all four categories the proposed model performs significantly better than the one that assumes that consumers use either irp or erp exclusively the authors discuss the managerial implications of this finding

redistribution with unobservable bequests a case for taxing capital income this paper addresses the question of the optimal taxation of labour and interest income in an overlapping generations model with two unobservable characteristics ability and inheritance we assume realistically that saving can only be taxed anonymously whereas the tax on labour earnings can be individualized and made non linear in such a setting we show that a withholding tax on interest income along with a non linear tax on labour income is desirable the role of interest income taxation is to indirectly tax inherited wealth

capital income taxation when inherited wealth is not observable this paper extends the atkinson stiglitz model of direct and indirect taxation to a dynamic setting with two unobservable characteristics productive ability and inherited wealth bequests are motivated by the joy of giving a child s inheritance is a random variable with a probability distribution that depends on his parent s investment in a bequest technology public borrowing is assumed and implies the modified golden rule we study the optimal tax policy when two instruments are available a non linear wage income tax and a proportional tax on capital income we show that the second instrument ought in general to be used but that the tax rate is not necessarily positive however a positive tax rate is more likely when there is a positive correlation between inherited wealth and innate ability

correlates of price acceptability the cognitive tradeoff between price and product quality is used as a basis for hypothesizing interrelationships between two individual difference variables and two price related responses results of a correlational study support the hypothesis of an inverse relationship between price consciousness and product involvement and the hypotheses that price consciousness and product involvement have opposite implications for several price related constructs results also indicate a positive relationship between price acceptability level and the width of the latitude of price acceptance

price uncertainty and consumer search a structural model of consideration set formation we offer an econometric framework that models consumer s consideration set formation as an outcome of her costly information search behavior because frequently purchased products are characterized by frequent price promotions of varying depths of discounts a consumer faces significant uncertainty about the prices of the brands the consumers engage in a fixed sample search strategy that results in their discovering the posted prices of a subset of the available brands this subset is referred to as the consumer s consideration set the proposed model is estimated using the scanner data set for liquid detergents our key empirical results are i consumers zincur significant search costs to discover the posted prices of the brands ii whereas in store displays and feature ads do not influence consumers quality perceptions of the brands they significantly reduce search costs for observing the prices of the brands iii per capita income of consumer s household significantly increases her search costs and iv the consumers price sensitivity is seriously underestimated if we were to assume that consumers get to know all the posted prices at zero cost the proposed model is also estimated for the ketchup category to enable us to do cross category comparisons of consumers price search behavior

hysteresis price acceptance and reference prices the existence of price thresholds in grocery retailing is well documented most authors explain the existence of price thresholds using assimilation contrast theory adaptation level theory or prospect theory however each of these theories is untenable if consumers are believed to behave rationally we offer a theoretical explanation grounded in real options theory rot and economic hysteresis we test the rot hypothesis against three plausible alternatives using a maximum likelihood friction model that we augment for unobserved heterogeneity our findings support the rot hypothesis and suggest that the existence of price thresholds in aggregate data are driven by a common recognition of real option values which do not disappear with the inclusion of consumer heterogeneity

reference points and effort provision a key open question for theories of reference dependent preferences is what determines the reference point one candidate is expectations what people expect could affect how they feel about what actually occurs in a real effort experiment we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision we find that effort provision is significantly different between treatments in the way predicted by models of expectation based reference dependent preferences if expectations are high subjects work longer and earn more money than if expectations are low

understanding reference price shoppers a within and cross category analysis abstract the authors attempt to draw profiles of reference price shoppers specifically the authors study how selected factors that affect brand choice are correlated with consumer sensitivity to gains and losses with respect to internal reference prices they also study the interaction between sociodemographics and gain and loss sensitivity furthermore the authors analyze cross category correlations in gain and loss sensitivity to shed light on their individual and category specific characters in three categories the results show significant heterogeneity in loss sensitivity among consumers and indicate that loss sensitivity is greater and more heterogeneous than gain sensitivity across categories the results show that loss sensitive shoppers are less influenced by past brand use and that both loss and gain sensitive shoppers more sensitive to price display and feature than the average consumer loss sensitive households tend to be larger and their heads are less likely to be fully employed