testing risk aversion and nonexpected utility theories abstract this paper tests risk aversion and compares several nonexpected utility theories using paired comparisons economic hypotheses associated with risk aversion are found not to hold in preference data expected utility with rank dependent probability is found to provide a smooth representation of preference for a wide range of preference types

the effects of oil price shocks in a new keynesian framework with capital accumulation the economic implications of oil price shocks have been extensively studied since the 1970s despite this huge literature no dynamic stochastic general equilibrium model was available that captures two well known stylized facts 1 the stagflationary impact of an oil price shock together with 2 the influence of the energy productivity of capital on the depth and length of this impact we build estimate and simulate a new keynesian model with capital accumulation which takes the case of an economy where oil is imported from abroad and where these stylized facts can be accounted for moreover the bayesian estimation of the model on the us economy 1984 2007 suggests that the output elasticity of oil might have been above 10 stressing the role of oil use in us growth at this time finally our simulations confirm that an increase in energy efficiency significantly attenuates the effects of an oil shock a possible explanation of why the third oil shock 1999 2008 did not have the same macro economic impact as the first two ones

international portfolio diversification with generalized expected utility preferences this paper revisits the home bias puzzle the relatively low interna tional diversification of portfolios we suggest that part of the diversifi cation puzzle may be due to reliance on the conventional capm model as the benchmark predicting patterns of diversification we compare the asset diver sification patterns of agents who maximize a generalized expected utility geu to the diversification of agents who maximize the conventional expected utility eu specifically we derive the patterns of diversification for agents who maximize a rank dependent expected utility attaching more weight to bad than to good outcomes in contrast to the probability weights used in a conventional expected utility maximization we show that agents who maximize a geu exhibit first order risk aversion and tend to refrain from di versification in contrast to the diversification of agents who maximize the eu for a given covariance structure we identify a cone of diversifica tion the range of domestic and foreign yields leading to a positive demand for both equities greater downside risk aversion increases the threshold of yields leading to diversification shifting the cone of diversification upwards and rightwards thus greater downsiderisk aversion narrows the range of foreign yields leading to diversification for a given domestic yield ceteris paribus greater downside risk aversion reduces the feasible hetero geneity of normalized excess yields associated with diversification conse quently we argue that first order risk aversion should be added to the explanatory factors that account for the observed diversification patterns

allocative disturbances and specific capital in real business cycle theories chanted albeit in varying degree with business cycle theories that either posit unexplained nominal wage and price rigidities or rely on misperceptions about nominal variables as a key driving force one response to this disenchantment has been a concentration of research effort on real business cycle theories aside from dissatisfaction with competitor theories the very visible oil price shock episodes of the 1970 s lent plausibility to the view that exogenous real disturbances cause large fluctuations in aggregate economic activity this essay on real business cycle theory considers the role of allocative disturbances in aggregate economic fluctuations when human and physical capital are specialized by allocative disturbances i mean events that impinge on the economy by inducing a costly time consuming reallocation of specialized resources at least since the publication of ricardo s principles in 1817 economists have recognized some of the potentially important aggregate consequences of allocative disturbances ricardo writes

secular labor reallocation and business cycles we study the eect of mean preserving idiosyncratic industry shocks on business cycle outcomes we develop an empirical methodology using a local area s exposure to industry reallocation based on the area s initial industry composition and employment trends in the rest of the country over a full employment cycle using confidential employment data by local area and industry over the period 1980 2014 we find sharp evidence of reallocation contributing to worse employment outcomes during national recessions but not during national expansions we repeat our empirical exercise in a multi area multi sector search and matching model of the labor market the model reproduces the empirical results subject to inclusion of two key empirically plausible frictions imperfect mobility across industries and downward nominal wage rigidity combining the empirical and model results we conclude that reallocation can generate substantial amplification and persistence of business cycles at both the local and the aggregate level

the cyclicality of labor market flows a multiple shock approach abstract in this paper we aim to establish some stylized facts about the relative contributions of the job finding and separation rates to unemployment dynamics depending on the nature of structural shocks the shocks in our bayesian structural var model are identified using a sign restriction approach and capture shifts in the three conditions determining labor market equilibrium in matching models the beveridge curve and the job creation and job destruction conditions using both us and french data we identify an aggregate shock to match profitability the aggregate profitability shock a shock specific to existing jobs the reallocation shock and a shock to the efficiency of the matching process the matching efficiency shock we find that the relative contributions of the job finding and separation rates are notably different across shocks in both countries but are similar across countries for each type of shock labor market dynamics appear to be transatlantic despite well known institutional differences however it must be emphasized that the reaction of the labor market variables to the matching efficiency shock seems more muted in the us than in france

for better or forever formal versus informal enforcement this article contrasts supporting partnerships through relational contracting and supporting partnerships through formal legal institutions a large population of players interact in bilateral relationships efficiency requires cooperation but cheating yields a higher short term payoff there is a positive probability that the maximum feasible payoff available to a partnership decreases opportunistic behavior makes it impossible to realize the efficient outcome a legal system can lead to efficient contracting without such a system productive relationships arise in equilibrium if it is costly to initiate new relationships this type of relational contracting tends to make partnerships last longer than is efficient

a behavioral analysis of stochastic reference dependence we examine the reference dependent risk preferences of k oszegi and rabin 2007 focusing on their choice acclimating personal equilibria concept we relate their model to other existing generalizations of expected utility we demonstrate that linear gain loss choice acclimating personal equilibria is equivalent to the intersection of quadratic utility and pessimistic rank dependent utility however it has only a trivial intersection i e expected utility with other referencedependent preferences we use these relationships to extend our understanding of k oszegi and rabin s model linking their functional form to behavior demonstrating new applications and deriving new tests and looking for support in existing experimental data 98 words

insurance with multiple insurers a game theoretic approach this paper studies the set of pareto optimal insurance contracts and the core of an insurance game our setting allows multiple insurers with translation invariant preferences we characterise the pareto optimal contracts which determines the shape of the indemnities closed form and numerical solutions are found for various preferences that the insurance players might have determining associated premiums with any given optimal pareto contract is another problem for which economic based arguments are further discussed we also explain how one may link the recent fast growing literature on risk based optimality criteria to the pareto optimality criterion and we show that the latter is much more general than the former one which according to our knowledge has not been pointed out by now further we extend some of our results when model risk is included i e there is some uncertainty with the risk model and or the insurance players make decisions based on divergent beliefs about the underlying risk these robust optimal contracts are investigated and we show how one may find robust and pareto efficient contracts which is a key decision making problem under uncertainty

the social welfare implications decomposability and geometry of the sen family of poverty indices in this paper we propose a unified framework for the sen indices of poverty intensity that shows an explicit connection between the indices and the common underlying social evaluation function we also identify the common multiplicative decomposition of the indices that allows simple and similar geometric interpretations and easy numerical computation jel classification c000 h000 o150 implications en termes de bien etre collectif decomposabilite et geometrie de la famille d indices de pauvretea la sen dans ce memoire les auteurs proposent un cadre d analyse integre des indices d intensite de pauvretea la sen qui souligne la relation explicite entre ces indices et la fonction sociale d evaluation commune qui les soustend les auteurs identifient aussi la decomposition multiplicative commune de ces indices qui permet d en donner des interpretations geometriques simples et idoines et de faire des calculs numeriques faciles

the ross characterization of risk aversion strengthening and extension this paper offers an interpretive comparison of the arrow pratt and ross characterizations of comparative risk aversion for expected utility maximizers the tools used in this comparison are then applied to obtain a strengthening of the ross cha racterization this strengthened result is in turn extended to the ca se of general smooth nonexpected utility preferences over probabili ty distributions copyright 1987 by the econometric society

separating the effects of aggregate and sectoral shocks with estimates from a markov switching search model abstract a two sector stochastic model of labor market search is estimated in order to identify aggregate and sectoral shocks which impact upon the recruitment intensity decisions of firms separation of aggregate and sectoral recruitment effects is achieved through the use of data for two canadian regions which were affected in opposite directions by recent resource price shocks the results of the estimation process suggest that sectoral shocks can have significant quantitative effects on unemployment duration and the unemployment rate

bargaining and boldness abstract we study a multiperson bargaining problem with general risk preferences through the use of shaked s game of cycling offers with exogenous breakdown if preferences are smooth then as the risk of breakdown vanishes the limiting outcome is one in which bargainers are equally marginally bold where a bargainer s marginal boldness measures his willingness to risk disagreement in return for a marginal improvement in his position under smoothness any ordinal nash solution is an equally marginally bold outcome however unlike the concept of the ordinal nash solution a unique equally marginally bold outcome exists in natural cases in particular if all bargainers have risk averse preferences of the rank dependent expected utility type for these preferences the equally marginally bold outcome maximizes a bargaining power adjusted asymmetric nash product where the degree of asymmetry is determined by the disparity in the marginal valuation of certainty among bargainers journal of economic literature classification numbers c72 c78 d81

on the driving forces behind cyclical movements in employment and job reallocation theory restricts short run job creation and destruction responses and cumulative employment and job reallocation responses to allocative and aggregate shocks we formulate these restrictions and implement them for postwar data on u s manufacturing allocative shocks are the main driving force behind cyclical movements in job reallocation but their contribution to employment fluctuations varies greatly across alternative identification assumptions also the data compel one or both of the following inferences aggregate shocks greatly alter the shape and not just the mean of the cross sectional density of employment growth rates allocative shocks cause short run reductions in aggregate employment

some remarks on quiggin s anticipated utility abstract this remark proves that quiggin s anticipated utility function may solve the allais paradox and the common ratio effect for some generalizations of these it is needed to assume that the decision weight function is concave

comparative statics and non expected utility preferences abstract researchers have shown that many though not all of the basic results of expected utility analysis can be more or less directly generalized to non expected utility preferences this paper describes the essential difference between results which can be extended in this manner and those which cannot and shows that an important family of comparative statics theorems falls into the former class

on the optimal design of lotteries is globally concave since thearguments against the plausibility of a convex utility function advanced in the previous sectionin relation to eu theory apply with equal force to the rdeu model by contrast as is shownbelow these arguments do not apply to risk seeking behavior associated with the possibility that

local risk aversion in the rank dependent expected utility model first order versus second order effects abstract we evaluate locally the risk premium of a lottery in the framework of the rdeu model as the sum of two terms the first is a measure of risk aversion while the second is a measure of spreading aversion

on the economic meaning of machina s frechet differentiability assumption abstract this note shows that m j machina s 1982 econometrica 50 277 323 assumption that preferences over lotteries are smooth has some economic implications we show that frechet differentiability implies that preferences represent second order risk aversion as well as conditional second order risk aversion this implies among other things that decision makers buy full insurance only at the absence of marginal loading we also show that with constant absolute and relative risk aversion expected value maximization second order risk aversion and frechet differentiability are equivalent journal of economic literature classification number d81

existence and uniqueness of ordinal nash outcomes abstract in this paper we present necessary and sufficient conditions for existence and uniqueness of ordinal nash outcomes these outcomes are derived from the ordinal nash solution a reinterpretation and an extension of the nash bargaining solution that allows bargainers to have preference relations that are more general than expected utility our task is undertaken by the construction of a new notion called induced utilities journal of economic literature classification number c78

dynamics of worker flows and vacancies evidence from the sign restriction approach this paper establishes robust dynamic features of the worker reallocation process in the us labor market i use structural vars with sign restrictions which take the form of restricting the short run negative relationship between vacancies and unemployment i e beveridge curve despite the weakness of these restrictions they reveal a clear unambiguous pattern that when unemployment increases and vacancies drop i both the separation rate and gross separations rise quickly and remain persistently high ii the job finding rate and vacancies drop in a hump shaped manner and iii gross hires respond little initially but eventually rise these results point to the importance of job loss in understanding us labor market dynamics this pattern also holds with respect to different kinds of shocks that induce the same beveridge curve relationship this paper also considers the disaggregate model which uses data disaggregated into six demographic groups and incorporates transitions into and out of the labor force i show that the separation rate continues to play a dominant role among prime age male workers while for other groups changes in the job finding rate are more important copyright 2009 john wiley sons ltd

a reconsideration of the interindustry employment dispersion abstract using both quarterly and annual data on both one digit and two digit u s code industries this paper finds that the interindustry dispersion of employment growth does not support the sectoral shift interpretation of unemployment cycles

sectoral shifts and cyclical unemployment a substantial fraction of cyclical unemployment is better characterized as fluctuations of the frictional or natural rate than as deviations from some relatively stable natural rate shifts of employment demand between sectors of the economy necessitate continuous labor reallocation since it takes time for workers to find new jobs some unemployment is unavoidable this paper presents evidence that most of the unemployment fluctuations of the seventies unlike those in the sixties were induced by unusual structural shifts within the u s economy simple time series models of layoffs and unemployment are constructed that include a measure of structural shifts within the labor market these models are estimated and a derived natural rate series is constructed

unemployment dynamics across oecd countries abstract the european community and the us have experienced vastly different unemployment dynamics over the last two decades this paper investigates whether these differences are due to exposure to different shocks or reacting differently to the same shocks with the premise of a search theoretic framework and a structural var methodology the paper robustly identifies aggregate versus reallocative shocks with the exception of spain where most of the dynamics seem to be driven by reallocation it is found that most differences in unemployment dynamics arise because of differences in responses to shocks in particular the us labour market is quicker to adjust than the european community this implies that eec economies might be dynamically sclerotic even if the size of the steady state labour market flows give the impression that european labour markets are quite active various identifying assumptions additional labour supply shocks and different variables are used yet the results appear robust

aggregate disturbances or sectoral shifts canadian evidence this paper is an empirical investigation of the relative importance of aggregate disturbances and sectoral shifts in the explanation of unemployment cycles in canada two contributions are made in this paper first the identification of these two shocks is accomplished by the mean and the dispersion of industrial stock returns respectively secondly detailed discussions on the interindustry employment movement are provided and a corresponding dispersion is reexamined using quarterly data over three digit industries all results here indicate the insignificance of sectoral shifts in canada

a generalization of pratt arrow measure to nonexpected utility preferences and inseparable probability and utility the pratt arrow measure of local risk aversion is generalized for then dimensional state preference model of choice under uncertainty in which the decision maker may have inseparable subjective probabilities and utilities unobservable stochastic prior wealth and or smooth nonexpected utility preferences local risk aversion is measured by the matrix of derivatives of the decision maker s risk neutral probabilities without reference to true subjective probabilities or riskless wealth positions and comparative risk aversion is measured without requiring agreement on true probabilities risk neutral probabilities and their derivatives are shown to be sufficient statistics for approximately optimal investment and financing decisions in complete markets for contingent claims

punishment schedules for capital flight w hat are appropriate penalties to discourage capital flight economic punishments can serve as effective deterrents for economic crimes but the penalties themselves are often costly to impose and enforce good public policy must take these costs into account in addition to the effectiveness of punishment schemes in order to construct a deterrent to economically motivated behaviour the environment that generates this motivation must be well understood we show that the incentives for capital flight can differ in predictable ways this difference in incentives implies that even though standard risk aversion analyses might suggest the opposite it will often be better to penalise larger transactions in a higher proportion than smaller ones a common definition of capital flight is the growth in the stock of one country s claims on non residents that generates income beyond the control of the domestic authorities see for example dooley 1988 rojas suarez 1990 or razin and sadka 1989 this notion is useful because it distinguishes between portfolio motivations for international capital allocation which are desirable on grounds of economic efficiency and movements of capital which are motivated by a desire to evade tax liabilities the latter type of capital movements imposes costs both in terms of lost government revenues and potential distortions in investment decisions we focus therefore on capital movements which are motivated by the illegal desire to shelter investment income from domestic taxation an understanding of capital flight requires a careful and consistent description of the economic environment that generates the motivations for this phenomenon for the remainder of this paper the following assumptions are maintained in order to match as closely as possible conditions that must hold for capital flight to exist

choices involving uncertain probabilities abstract this paper contains an analytic and empirical component the analytic one examines how people should value information on probabilities versus payoffs according to expected utility theory it also examines under what conditions various generalized utility models such as subjective expected utility theory prospect theory and rank dependent utility entail testable predictions for preference for information the empirical component examines people s actual information preferences and to what extent they fit the various models after describing two experiments and their findings it is concluded that generalized utility models are unlikely to offer much insight into risky decision making

oil price shocks and the dispersion hypothesis recent research by david lilien shows that a significant fraction of aggregate unemployment can be explained by the dispersion of employment growth across industries this paper presents two new results in this area first it is shown that a significant fraction of the variation in lilien s dispersion index is due to the differential impact of oil shocks across industries second and more important it is shown that once the dispersion in employment growth due to oil shocks is accounted for the residual dispersion has no explanatory power for unemployment

sectoral shifts and cyclical unemployment reconsidered this paper develops a new measure of reallocation shocks based on the variance of industry stock market excess returns to assess the contribution of sectoral reallocation to unemployment in the postwar u s economy the beveridge curve relationship is used to establish that this series isolates reallocation shocks reallocation shocks are found to explain only a moderate share of the fluctuations in aggregate unemployment on average over the period however reallocation accounted for a substantial share of increases in unemployment in several episodes particularly the mid 1970s reallocation shocks also account for a larger share of fluctuations in unemployment of longer durations than of shorter durations

the probability premium a graphical representation we illustrate that pratt s probability premium can be given a simple graphical representation allowing a direct comparison to the equivalent but more prevalent concept of risk premium under expected utility we also show that the probability premium s graphical representation under the dual theory mimics that of the risk premium under expected utility

the value of a statistical life under ambiguity aversion abstract the paper shows that ambiguity aversion increases the value of a statistical life if the marginal utility of an increase in wealth is larger if one is alive rather than dead intuitively ambiguity aversion has a similar effect as an increase in the perceived baseline mortality risk and thus operates as the dead anyway effect a numerical example suggests however that ambiguity aversion cannot justify the substantial ambiguity premium apparently embodied in environmental policy making the paper also shows that ambiguity aversion decreases the marginal cost of individual self protection effort but may well decrease its marginal benefit so that the total effect of ambiguity aversion on self protection is unclear

comment on risk preferences are not time preferences separating risk and time preference andreoni and sprenger 2012a b observe that utility functions are distinct for risk and time preferences and show that their findings are consistent with a preference for certainty we revisit this question in an enriched experimental setting in which subjects make intertemporal decisions under different risk conditions the observed choice behavior supports a separation between risk attitude and intertemporal substitution rather than a preference for certainty we further show that several models including epstein and zin 1989 chew and epstein 1990 and halevy 2008 exhibit such a separation and can account for the overall experimental findings jel c91 d81 d91 risk and time preferences are the cornerstones of economic analyses regarding risk preference expected utility eu has been the predominant theory in which the curvature of the utility index captures risk attitude regarding time preference discounted utility is the most widely used model in which the curvature of the utility index captures intertemporal substitution when risk and time are intertwined integrating the two theories yields discounted expected utility deu which evaluates a contingent consumption plan c c c 3 as follows

stochastic dominance in regret theory the regret theory of choice under uncertainty is known to admit intransitivities in preference relations in this paper the stochastic dominance properties of the theory are examined it is shown that the usual definition of first stochastic dominance is not satisfied by regret theoretic preferences and that in general violations of first stochastic dominance are not merely permitted but required an exact characterization of the stochastic dominance rule corresponding to regret theoretic preferences is presented this concept is weaker than the usual definition but stronger than the notion of statewise dominance in which one prospect yields a preferred outcome with probability 1 theories of choice under uncertainty have proliferated in recent years after a long period in which the expected utility eu approach of von neumann and morgenstern 1944 was pre eminent the breakdown of the dominance in eu theory reflects the increasing body of evidence that the choices made by many people systematically violate the predictions of the theory the axiomatic foundations of the theory and in particular the independence axiom have also received severe questioning ever since the famous critique of allais 1953

the aggregate effects of sectoral reallocations abstract can a one time permanent change in the fundamentals behind the sectoral composition of the economy prompt an aggregate downturn can this downturn be non negligible even if one uses us data to determine the relative size of gross vs net job flows and the importance of job creation costs can one consider the military build down of the 1990s as a plausible cause for the 1990 1991 recession do sectoral reallocations generate responses that are qualitatively similar to productivity shocks we use a variant of the mortensen pissarides 1994 review of economic studies 61 397 415 job creation destruction model calibrate it to us labor market data and run experiments that suggest one can answer yes to all these questions

a neoclassical model of unemployment and the business cycle this paper investigates a general equilibrium model of unemployment and the business cycle in which specialization of labor plays a key role a rational expectations equilibrium with fully flexible wages and prices can exhibit unemployment in which the marginal product of employed workers exceeds the reservation wage of those who are without jobs workers are unemployed either because they are in the process of relocating for a better job or because they are waiting for conditions in the depressed sector to improve moreover seemingly small disruptions in the supplies of primary commodities such as energy could be the source of fluctuations in aggregate employment and can exert surprisingly large effects on real output

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

a cardinal characterization of the rubinstein safra thomson axiomatic bargaining theory in a recent paper rubinstein safra and thomson rst have provided an interesting re examination of the widely applied nash solution for a two person bargaining problem they recast the usual nash bargaining problem into a more natural setting of feasible alternatives with a disagreement outcome the two players are then described by their risk preferences defined on the set of lotteries over the alternatives and the disagreement outcome this enables them to define an ordinal nash solution in terms of the agents risk preferences essentially their ordinal solution is an outcome that is immune against possible objections freeing the definition of the nash solution from utility naturally led rst to extending its scope to non expected utility neu preferences we contend however that the family of neu preferences considered by rst is unduly restrictive the assumptions imposed on the risk preferences by rst essentially exclude any members of the rank dependent expected utility rdeu and betweenness families that can accommodate the very choice paradoxes that stimulated the development of neu theory as these are two of the most extensively analyzed and widely applied neu models in the literature this seems to cast doubt on how broad an extension to neu preferences the rst approach affords we demonstrate however that rst s analysis can be modified so that their conclusion is valid in a wider class of preferences that can include examples of rdeu preferences this class consists of preferences that admit what we term a disagreement linear representation

unemployment and vacancies with sectoral shifts recent analyses of unemployment vacancy series suggest that aggregate shocks rather than sectoral shocks are the primary factors responsible for unemployment fluctuations this inference follows from two widely held beliefs sectoral shocks induce only positive unemployment vacancy comovements while negative comovements are necessarily the result of aggregate demand shocks this paper describes an equilibrium matching model that identifies plausible circumstances in which neither assumption is correct thus suggesting that unemployment vacancy data are inconclusive interestingly this model s novel results are due to standard features in the contracting literature firms experience relative price shocks and negotiate contracts that prescribe temporary layoffs copyright 1994 by american economic association

real business cycles a new keynesian perspective the debate over the source and propagation of economic fluctuations rages as fiercely today as it did 50 years ago in the aftermath of keynes s the general theory and in the midst of the great depression today as then there are two schools of thought the classical school emphasizes the optimization of private economic actors the adjustment of relative prices to equate supply and demand and the efficiency of unfettered markets the keynesian school believes that understanding economic fluctuations requires not just studying the intricacies of general equilibrium but also appreciating the possibility of market failure on a grand scale

reallocation shocks persistence and nominal rigidities abstract we reconsider the role of reallocation shocks in a simple new keynesian model with search and matching frictions the sign of the conditional correlation between unemployment and vacancies depends on the degree of price rigidity and on the persistence of the shock therefore a non negligible role for reallocation shocks in driving business cycle fluctuations cannot be ruled out on theoretical grounds

the effect of decision weights in bargaining problems abstract bargaining problems are considered where the preferences of the bargainers deviate from expected utility but can be modelled according to rank dependent utility theory under rank dependent utility both the utility function and the probability weighting function influence the risk attitude of a decision maker the same definition of risk aversion leads to two forms of risk aversion utility risk aversion and probabilistic risk aversion the main finding is that these two forms can have surprisingly opposite consequences for bargaining solutions that exhibit a weak monotonicity property in particular in a large class of bargaining problems both increased utility risk aversion and decreased probabilistic risk aversion of the opponent are advantagous for a player this is demonstrated for the kalai smorodinsky bargaining solution the nash bargaining solution does not behave regularly in this respect

risk aversion in the theory of expected utility with rank dependent probabilities expected utility with rank dependent probability theory is a model of decision making under risk where the preference relations on the set of probability distributions is represented by the mathematical expectation of a utility function with respect to a transformation of the probability distributions on the set of outcomes this paper defines based on g teaux differentiability measures of risk aversion for such preferences which characterize the relation more risk averse and applies these measures to the analysis of unconditional and conditional portfolio choice problems

developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

cyclical fluctuations and sectoral reallocation evidence from the psid abstract this paper documents the correlation between permanent sectoral reallocation and the business cycle using data from the michigan panel study of income dynamics we find that the outflow of workers from goods to services accelerates during recessions the flow from services to stable employment in surables accelerates during booms we also document the contribution of sectoral reallocation to total unemployment permanent switchers account for about a quarter of the total weeks of unemployment during booms this proportion rises to nearly 40 duing recessions

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

when can expected utility handle first order risk aversion abstract expected utility functions are limited to second order conditional risk aversion while non expected utility functions can exhibit either first order or second order conditional risk aversion we extend the concept of orders of conditional risk aversion to orders of conditional dependent risk aversion we show that first order conditional dependent risk aversion is consistent with the framework of the expected utility hypothesis our theoretical result proposes new insights into economic and financial applications such as the equity premium puzzle the cost of business cycles and stock market participation our model is compared to the rank dependent expected utility model

an index of loss aversion to a considerable extent risk aversion as it is commonly observed is caused by loss aversion several indexes of loss aversion have been proposed in the literature the one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components basic utility probability weighting and loss aversion the index is independent of the unit of payment the main theorem shows how the indexes of different decision makers can be compared through observed choices

mobility costs frictional unemployment and efficiency with imperfect job information flows it is plausible that the distribution of job offerings becomes more attractive when there are more vacancies and more unemployed with word of mouth communication this condition is derived given this condition steady state equilibrium is not efficient with welfare increased by the introduction of unemployment compensation even though all agents are risk neutral in this way workers become more selective in the jobs they accept

differences in state unemployment rates the role of labor and product market structural shifts state unemployment rates diverged dramatically in the 1980s differing unemployment rates across states are an important public policy concern because of equity concerns and the pure human consequences of higher unemployment moreover at the national level a greater dispersion in state and regional unemployment rates can increase the natural rate of unemployment and shift the phillips curve out because of an inefficient allocation of the labor force 3 38 one possible cause for the divergence in unemployment rates is national industrial restructuring u s industrial restructuring was suggested by lilien 26 as a cause for the rise in the national unemployment rate moreover national restructuring can have differential impacts across states because states can have dramatically different mixes of industries from each other one of the difficulties of national restructuring from a regional perspective is that it is difficult to avoid on the other hand if regional differences in unemployment are due to state idiosyncratic causes state and local public policy can potentially play a more active role for example the economic problems that plagued the northeast and california during the early 1990s have been typically attributed to national downsizing in the defense industries conversely economic problems in these states may have been driven by factors that are located within the state such as the collapse of their real estate markets

a definition of uncertainty aversion a definition of uncertainty or ambiguity aversion is proposed it is argued that the definition is well suited to modelling within the savage as opposed to anscombe and aumann domain of acts the defined property of uncertainty aversion has intuitive empirical content behaves well in specific models of preference multiple priors and choquet expected utility and is tractable tractability is established through use of a novel notion of differentiability for utility functions called eventwise differentiability

star shaped probability weighting functions and overbidding in first price auctions there is a debate about whether risk aversion is the main source of overbidding in a first price independent private values auction as an alternative we adopt a non expected utility framework and identify an interpretable property on the probability weighting function which always induces overbidding

stochastic dominance analysis without the independence axiom we characterize the consistency of a large class of nonexpected utility preferences including mean variance preferences and prospect theory preferences with stochastic orders for example stochastic dominances of different degrees our characterization rests on a novel decision theoretic result that provides a behavioral interpretation of the set of all derivatives of the functional representing the decision maker s preferences as an illustration we consider in some detail prospect theory and choice acclimating preferences two popular models of reference dependence under risk and we show the incompatibility of loss aversion with prudence this paper was accepted by james smith decision analysis

intrinsic preference for information abstract suppose agents value information not only to make contingent plans but also intrinsically how are such attitudes toward information related to attitudes toward risk we generalize the kreps porteus recursive expected utility model dropping both recursivity and expected utility there is a geometric analogy between risk and information we characterize intrinsic information loving in general by a substitution property analogous to multivariate risk loving and for smooth preferences by the convexity of gateaux derivatives even with recursivity preference for information does not imply expected utility we provide an example we examine connections between information loving and risk aversion for early and late resolving risks journal of economic literatureclassification numbers d80 d81

efficient allocations under ambiguity abstract important implications of the expected utility hypothesis and risk aversion are that if agents have the same probability belief then consumption plans in every efficient allocation of resources under uncertainty are comonotone with the aggregate endowment and if their beliefs are concordant then the consumption plans are measurable with respect to the aggregate endowment we study these two properties of efficient allocations for models of preferences that exhibit ambiguity aversion using the concept of conditional beliefs which we introduce in this paper we provide characterizations of such conditional beliefs for the standard models of preferences used in applications

approximate portfolio analysis abstract this paper presents a portfolio selection model based on the idea of approximation the model describes a portfolio by its decumulative distribution curve and a preference structure by a family of convex indifference curves it prescribes the optimal portfolio as the one whose decumulative curve has the highest tangent indifference curve the model extends the mean variance model in the sense that it does not restrict the return distributions of assets to be normal while under the assumption of normality the model simplifies to the mean variance model the model has a measure of risk attitudes that resembles the arrow pratt measure while combining both wealth and probability attitudes using this measure we show that the smaller the curvature of a value function and the larger the curvature of a weighting function the more risk averse an agent

mismatch shocks and unemployment during the great recession summary we investigate the macroeconomic consequences of fluctuations in the effectiveness of the labor market matching process with a focus on the great recession we conduct our analysis in the context of an estimated medium scale dynamic stochastic general equilibrium model with sticky prices and equilibrium search unemployment that features a shock to the matching efficiency or mismatch shock we find that this shock is not important for unemployment fluctuations in normal times however it plays a somewhat larger role during the great recession when it contributes to raise the actual unemployment rate by around 1 3 percentage points and the natural rate by around 2 percentage points the mismatch shock is the dominant driver of the natural rate of unemployment and explains part of the recent shift of the beveridge curve copyright 2016 john wiley sons ltd