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

a two person dynamic equilibrium under ambiguity this paper describes a pure exchange continuous time economy with two heterogeneous agents and complete markets a novel feature of the economy is that agents perceive some security returns as ambiguous in the sense often attributed to frank knight the equilibrium is described completely in closed form after identifying agents as countries the model is applied to address the consumption home bias and equity home bias puzzles 2002 elsevier science b v all rights reserved jel classi cation d81 g11 g12 g15

the ellsberg paradox and risk aversion an anticipated utility approach the paper describes a decision process under which it is rational to prefer a lottery with known probabilities to a similar ambiguous lottery where the decision maker does not know the exact values of the probabilities the ellsberg paradox this is done by modeling ambiguous lotteries as two stage lotteries by assuming the independence axiom without the reduction of compound lotteries axiom and by using the anticipated utility functional this paper also gives conditions under which less ambiguity is preferred and presents some comparative statics analysis as well as some inter personal comparisons finally it proves that within the anticipated utility framework risk and ambiguity are almost identical copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

behavioural development economics lessons from field labs in the developing world abstract explanations of poverty growth and development depend on the assumptions made about individual preferences and the willingness to engage in strategic behaviour economic experiments especially those conducted in the field have begun to paint a picture of economic agents in developing communities that is at variance with the traditional portrait we review this growing literature with an eye towards preference related experiments conducted in the field we also offer lessons on what development economists might learn from experiments we conclude by sharing our thoughts on how to conduct experiments in the field and then offer a few ideas for future research

compound risk aversion ambiguity and the willingness to pay for microinsurance abstract index insurance in which payments are based on an index correlated with but not identical to individual losses has been faced with an unexpectedly low uptake despite its promise as a tool for poverty alleviation this paper offers new insights into the behavioral impediments to the uptake of index insurance we start from the observation that an index insurance contract appears to the farmer as a compound lottery with uncertainty about individual production outcomes as well as about the validity of the index as a reflection of individual losses adopting the smooth model of ambiguity aversion to this insurance problem we show that in theory this compound lottery structure per se will dampen the demand for index insurance using framed field experiments with cotton farmers in southern mali we elicited the coefficients of risk aversion and compound risk aversion the experimental results find that almost 60 of farmers are compound risk averse and that the distribution of compound risk aversion is such that it would nearly cut in half the potential demand for the standard index insurance contracts our results highlight the importance of designing contracts with minimal basis risk under compound risk aversion such a reduction in basis risk would not only enhance the value and productivity impacts of index insurance but would also assure that the contracts are purchased and have their anticipated impacts

catastrophe economics the national flood insurance program hurricane betsy which hit louisiana september 9 1965 was one of the most intense deadly and costly storms ever to make landfall in the united states it killed 76 people in louisiana and caused 1 5 billion in damage equal to nearly 10 billion in 2010 dollars in 1965 no flood insurance was available so victims had to rely on friends and family charities or federal relief after that catastrophe the u s government established a new program in 1968 the national flood insurance program nfip to make flood insurance widely available now after more than 40 years of operation the nfip is today one of the longest standing government run disaster insurance programs in the world in this paper i present an overview of the 40 years of operation of the national flood insurance program starting with how and why it was created and how it has evolved to now cover 1 23 trillion in assets i analyze the financial balance of the nfip between 1969 and 2008 excluding the 2005 hurricane season which included hurricane katrina as an outlier policyholders have paid nearly 11 billion more in premiums than they have received in claim reimbursements over that period however the program has spent an average of 40 percent of all collected premiums on administrative expenses more than three quarters of which were paid to private insurance intermediaries who sell and manage flood insurance policies on behalf of the federal government but do not bear any risk i present challenges the nfip faces today and propose ways those challenges might be overcome through innovative modifications

equilibrium parallel import policies and international market structure in a north south vertically differentiated duopoly the analysis in this paper derives equilibrium government policies towards parallel imports by incorporating strategic interaction at the policy setting stage and the product market the model sheds new light on i the effects of parallel import policies on pricing behavior of firms and ii the interdependence of national parallel import policies if demand asymmetry across countries is sufficiently large the north forbids parallel imports to ensure its firm sells in the south thereby generating international price discrimination the south s most preferred market outcome as the equilibrium when demand structures are relatively similar across countries the north permits parallel imports and uniform pricing its most preferred market outcome obtains

small worlds modeling attitudes toward sources of uncertainty abstract we introduce the concept of a conditional small world event domain an extension of savage s the foundations of statistics wiley new york 1954 notion of a small world as a self contained collection of comparable events under weak behavioral conditions we demonstrate probabilistic sophistication in any small world event domain without relying on monotonicity or continuity probabilistic sophistication within though not necessarily across small worlds provides a foundation for modeling a decision maker that has source dependent risk attitudes this also helps formalize the idea of source preference and suggests an interpretation of ambiguity aversion often associated with ellsberg type behavior in terms of comparative risk aversion across small worlds

what drives households to buy flood insurance new evidence from georgia abstract benefiting from access to detailed data on the federally run national flood insurance program for the entire state of georgia usa we analyze residential flood insurance purchasing behavior in that state over more than three decades 1978 2010 the demand for flood insurance on an extensive margin based on take up rates is found to be relatively price inelastic aligned with the behavioral economics literature recent flood events temporarily increase purchases but this effect fades after 3 years we also find that the proportion of developed area in floodplains has a significant positive impact on insurance take up rates contrary to what is often assumed we do not find evidence that insurance purchase and mitigation efforts are substitutes educated individuals individuals over the age of 45 and african americans are all else equal more likely to purchase flood insurance

economic experiments hypothetical surveys and market data studies of insurance demand against low probability high impact risks a systematic review of designs theoretical insights and determinants of demand this paper provides a systematic review of the literature on 80 experimental hypothetical survey and market data studies of insurance demand against low probability high impact risks the objective of the review is to extract lessons from these studies and to outline an agenda for future research we contrast the results of experimental and survey studies to findings from market data we focus on experimental design methods insurance characteristics as well as results about theories heuristics behavioural biases and explanatory variables lessons for policymakers are drawn which can facilitate disaster preparedness

uncertainty and risk in financial markets this paper considers a general equilibrium model in which the distinction between uncertainty and risk is formalized by assuming agents have incomplete preferences over statecontingent consumption bundles as in bewley 1986 without completeness individual decision making depends on a set of probability distributions over the state space a bundle is preferred to another if and only if it has larger expected utility for all probabilities in this set when preferences are complete this set is a singleton and the model reduces to standard expected utility in this setting we characterize pareto optima and equilibria and show that the presence of uncertainty generates robust indeterminacies in equilibrium prices and allocations for any specification of initial endowments we derive comparative statics results linking the degree of uncertainty with changes in equilibria despite the presence of robust indeterminacies we show that equilibrium prices and allocations vary continuously with underlying fundamentals equilibria in a standard risk economy are thus robust to adding small degrees of uncertainty finally we give conditions under which some assets are not traded due to uncertainty aversion

international effects of national regulations external reference pricing and price controls under external reference pricing erp the price that a government permits a firm to charge in its market depends upon the firm s prices in other countries in a two country home and foreign model where demand is asymmetric across countries we show that home s unilaterally optimal erp policy permits the home firm to engage in a threshold level of international price discrimination above which it is just willing to export if the firm faces a price control abroad or bargains over price with the foreign government an erp policy can even yield higher home welfare than a direct price control

non additive beliefs and strategic equilibria abstract this paper studies n player games where players beliefs about their opponents behaviour are modelled as non additive probabilities the concept of an equilibrium under uncertainty which is introduced in this paper extends the equilibrium notion of dow and werlang 1994 j econom theory 64 305 324 to n player games in strategic form existence of such an equilibrium is demonstrated under usual conditions for low degrees of ambiguity equilibria under uncertainty approximate nash equilibria at the other extreme with a low degree of confidence maximin equilibria appear finally robustness against a lack of confidence may be viewed as a refinement for nash equilibria journal of economic literature classification numbers c72 d81

ambiguity aversion and comparative ignorance decisions under uncertainty depend not only on the degree of uncertainty but also on its source as illustrated by ellsberg s observation of ambiguity aversion in this article we propose the comparative ignorance hypothesis according to which ambiguity aversion is produced by a comparison with less ambiguous events or with more knowledgeable individuals this hypothesis is supported in a series of studies showing that ambiguity aversion present in a comparative context in which a person evaluates both clear and vague prospects seems to disappear in a noncomparative context in which a person evaluates only one of these prospects in isolation

an elementary proposition concerning parallel imports abstract this paper demonstrates that when countries individually choose whether or not to prohibit parallel imports a global nash equilibrium involves the permitting of parallel importing into all relevant foreign markets i e global uniform pricing this result is sensitive in a straightforward way to the tariff setting powers of countries and to the specification of a government s objective function i e political economy considerations we also show that when countries can prevent parallel exports then any nash equilibrium involves global price discrimination

dynamically consistent beliefs must be bayesian abstract experimental evidence such as the ellsberg paradox contradicts the savage model of decision making under uncertainty since the representation of beliefs underlying preferces by a single probability measure leaves no room for the degree of imprecision in information to affect decisions proceeding axiomatically this paper shows that the existence of a bayesain prior is implied even if savage s sure thing principle is deleted if preferences i are based on beliefs and ii admit dynamically consistent updating in response to new information the result raises questions about the appeal of models of preference that feature a separation of tastes and beliefs journal of economic literature classification number d81

risk attitudes to low probability climate change risks wtp for flood insurance abstract natural disasters may increase in frequency and severity in the future as a result of climate change which is likely to have an impact on the demand for natural disaster insurance insights about individual risk beliefs and behavioural responses to changing risks are relevant for insurers as it allows them for example to estimate the demand for new insurance products that cover weather related damage this study elicits individual risk beliefs and the demand for low probability high impact flood insurance using the contingent valuation survey method among approximately 1000 homeowners in the dutch river delta this study is of practical relevance since currently flood insurance is not available in the netherlands while insurers have been considering to provide such insurance individuals generally do not behave in accordance with the expected utility model since a significant proportion of homeowners neglect the low probability flood risk the willingness to pay wtp of those individuals who demand flood insurance is on average considerably higher than the expected value of the flood risk they face moreover the wtp for flood insurance is less than proportionally related to increased flood probabilities that were presented to respondents in the questionnaire individuals follow a process of bayesian updating of flood probabilities since perceptions of flood risk are an important determinant of the wtp while objective risks derived from geographical characteristics influence the wtp to a lesser extent communication of baseline probabilities and changes in flood probabilities using risk ladders facilitate the comprehension of risk by respondents and has a considerable effect on the level of the wtp and its sensitivity to probability changes the results indicate that the current ex post public compensation scheme of flood damage lowers demand for private insurance

a dynamic ellsberg urn experiment two rationality arguments are used to justify the link between conditional and unconditional preferences in decision theory dynamic consistency and consequentialism dynamic consistency requires that ex ante contingent choices are respected by updated preferences consequentialism states that only those outcomes which are still possible can matter for updated preferences we test the descriptive validity of these rationality arguments with a dynamic version of ellsberg s three color experiment and find that subjects act more often in line with consequentialism than with dynamic consistency

how individuals choose health insurance an experimental analysis an individual choosing a health insurance policy faces a complex decision environment where a large set of alternatives differ on a variety of dimensions there is uncertainty and the choice is repeated at least once a year we study decisions and decision strategies in a laboratory experiment where we create a controlled environment that closely mirrors this setting we use an electronic information board that allows to carefully monitor the individual s decision strategy the number of alternatives switching costs and the speed at which health deteriorates are varied across treatments we find that most subjects search is based more on attributes than on policies moreover we find that an increase in the number of alternatives increases decision making time makes subjects consider a lower fraction of the available information makes it more likely that subjects will switch and decreases the quality of their decisions the introduction of positive costs of switching makes people switch less often but improves the quality of their decisions finally if health deteriorates only gradually individuals tend to stick to their current policy too long

when disaster strikes under insurance in australian households in undertaking what we believe is the first national scale study of its kind we provide methodologically transparent statistically robust insights into associations and potential unfolding effects of house and contents under insurance we identify new dimensions in the complex relationship between householders and insurance including the salience of interpersonal and likely institutional trust under insurance is re produced along socio economic and geographical lines with those of lower socio economic status or living in cities more likely to be under insured should a disaster strike such communities are likely to suffer further disadvantage especially if governments continue to shift the responsibility for risk onto households our findings support the observation that insurance can contribute to increasing socio economic urban polarisation in light of natural disasters we conclude by considering how under insurance may contribute to growing urban social stratification as well as how it may produce situated ethical and political responses that exceed neoliberal aspirations

risk and rationality the effects of mood and decision rules on probability weighting empirical research has shown that people tend to overweight small probabilities and underweight large probabilities when valuing risky prospects but little is known about factors influencing the shape of the probability weighting curve based on a laboratory experiment with monetary incentives we demonstrate that pre existing good mood is significantly associated with women s probability weights women in a better than normal mood tend to weight probabilities relatively more optimistically many men however seem to be immunized against effects of incidental mood by applying a mechanical decision criterion such as maximization of expected value

attitudes to risk and attitudes to uncertainty experimental evidence in a series of experiments the interactions among individual attitudes towards risk and uncertainty the sign of the outcome domain and the way uncertainty is represented are tested this is done in a unified framework eliciting individual values by means of a second price auction results confirm the presence of the well known fourfold pattern of risk attitude risk aversion for gains and risk seeking for losses at high probability and risk seeking for gains and risk aversion for losses at low probability and show that this pattern can also be extended to uncertainty in the valuation of losses the modal pattern is decreasing risk and uncertainty aversion as the probability of loss increases while increasing risk and uncertainty aversion is observed for gains moreover it is found that the size of reaction to uncertainty does not depend on the outcome domain and that it persists in the face of an incentive compatible mechanism to elicit preferences

characterizing optimism and pessimism directly through comonotonicity pessimism independence is introduced to characterize pessimistic risk attitudes for the nonlinear probability models of schmeidler quiggin and yaari directly in terms of comonotonicity rather than through additional conditions such as convexity of preferences pessimism independence requires the mixture of an arbitrary good and a fixed act to be preferred to the mixture of a comonotonic bad act and the fixed act thus more general than full force independence it does not exclude the additional pessimistic appreciation of the hedging involved in the mixture of a noncomonotonic bad and fixed act more restrictive than comonotonic independence it does exclude optimistic aversion of hedging

ambiguity aversion and incompleteness of financial markets it is widely thought that incomes risks can be shared by trading in financial assets but financial assets typically carry some risk idiosyncratic to them hence disposing incomes risk using financial assets will involve buying into the inherent idiosyncratic risk however standard theory argues that diversification would reduce the inconvenience of idiosyncratic risk to arbitrarily low levels this argument is less robust than what standard theory leads us to believe ambiguity aversion can exacerbate the tension between the two kinds of risks to the point that classes of agents may not want to trade some financial assets thus theoretically the effect of ambiguity aversion on financial markets is to make the risk sharing opportunities offered by financial markets less complete than it would be otherwise

reference pricing and firms pricing strategies abstract within a horizontal differentiation model and allowing for heterogeneous qualities we analyze the effects of reference pricing reimbursement on firms pricing strategies with this analysis we find inherent incentives for firms pricing behavior and consequently we shed some light on the time consistency of such policy the analysis encompasses different reference price rules i reference price as the minimum of the observed prices in the market ii reference price as a linear combination of firms prices results show that under the minimum policy firms are not able to coordinate on higher prices while the linear policy implicitly provides a coordination device we have also found that relatively to the linear policy when the reference price is the minimum of observed prices after policy implementation total and private expenditures are higher and consumer surplus and firms profits are lower with quality differentiation both the minimum and linear policies unambiguously lead to higher prices

how general are risk preferences choices under uncertainty in different domains we analyze the extent to which individuals choices over five employer provided insurance coverage decisions and one 401 k investment decision exhibit systematic patterns as would be implied by a general utility component of risk preferences we provide evidence consistent with an important domain general component that operates across all insurance choices we find a considerably weaker relationship between one s insurance decisions and 401 k asset allocation although this relationship appears larger for more financially sophisticated individuals estimates from a stylized coverage choice model suggest that up to thirty percent of our sample makes choices that may be consistent across all six domains

pharmaceutical price controls and entry strategies abstract this paper finds that the use of price controls has a statistically and quantitatively important effect on the extent and timing of the launch of new drugs firms headquartered in countries that regulate price reach fewer markets than those in countries without price controls companies avoid price controlled markets and are less likely to introduce products in additional markets after entering a price controlled country launches into low price european countries are further delayed following legalization of parallel imports the results suggest that price regulation in one country affects entry into other countries and may affect the strategies of domestic firms

multiple dimensions of private information evidence from the long term care insurance market we demonstrate the existence of multiple dimensions of private information in the long term care insurance market two types of people purchase insurance individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance ex post the former are higher risk than insurance companies expect while the latter are lower risk in aggregate those with more insurance are not higher risk our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence the results also suggest a general test for asymmetric information

farm earnings educational attainment and role of public policy some evidence from mexico abstract using real household survey data from mexico this study evaluates 1 a the impact of schooling on farm earnings through the direct and allocative effects of human capital 2 b the household demand for children s schooling 3 c using macro level data the association between children s school participation and some policy variables the overall rate of return to household heads schooling is estimated at 25 and for wives 19 the allocative effect of schooling of household heads dominates over the direct effect mother s schooling and farm size exercise significantly positive effects on household demand for schooling while in the macro model policy variables government expenditure and pupil teacher ratio appear strong determinants of children s attainment of primary schooling

price discrimination and social welfare studies the effect of price discrimination on social welfare using methods from duality theory features of the reservation model presented quasi linear utility and consumers surplus upper and lower bounds on welfare change bounds on welfare change with optimal price discrimination from ebsco

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

a theory of subjective compound lotteries abstract we develop a savage type model of choice under uncertainty in which agents identify uncertain prospects with subjective compound lotteries our theory permits issue preference that is agents may not be indifferent among gambles that yield the same probability distribution if they depend on different issues hence we establish subjective foundations for the anscombe aumann framework and other models with two different types of probabilities we define second order risk as risk that resolves in the first stage of the compound lottery and show that uncertainty aversion implies aversion to second order risk which implies issue preference and behavior consistent with the ellsberg paradox

risk aversion and expected utility theory a calibration theorem within the expected utility framework the only explanation for risk aversion is that the utility function for wealth is concave a person has lower marginal utility for additional wealth when she is wealthy than when she is poor this paper provides a theorem showing that expected utility theory is an utterly implausible explanation for appreciable risk aversion over modest stakes within expected utility theory for any concave utility function even very little risk aversion over modest stakes implies an absurd degree of risk aversion over large stakes illustrative calibrations are provided

credit programmes for the poor and seasonality in rural bangladesh this article examines the effect of group based credit used to finance self employment by landless households in bangladesh on the seasonal pattern of household consumption and male and female labour supply this credit can help smooth seasonal consumption by financing new productive activities whose income flows and time demands do not seasonally covary with the income generated by existing agricultural activities the results based upon 1991 92 survey data strongly suggest that an important motivation for credit programme participation is the need to smooth the seasonal pattern of consumption and male labour supply it is only the extent of lean season consumption poverty that selects household into these programmes in addition the largest female and male effects of credit on household consumption are during the lean season

effect of flood on agricultural wages in bangladesh an empirical analysis summary this paper analyzes the effects of riverine floods on agricultural wages in bangladesh drawing upon the district wise monthly data over 1979 2000 we model wages as a dynamic process we find that floods have positive implications for wages in the long run in flood months however agricultural wages decline in the inundated districts we obtain difference in difference estimates to show that the magnitude of impact of flood depends on the relative flood proneness of a district and the relative severity of flood conditions our results indicate that favorable demand and supply conditions in the agricultural labor market can mitigate the impact of disasters on wages in bangladesh

auction choice for ambiguity averse sellers facing strategic uncertainty abstract the robustness of the bayes nash equilibrium prediction for seller revenue in auctions is investigated in a framework of interdependent valuations generated from independent signals seller expected revenue may fall well below the equilibrium prediction even though the individual payoff consequences of suboptimal bidding may be small for each individual bidder this possibility would be relevant to a seller who models strategic uncertainty as ambiguity and who is ambiguity averse in the sense of gilboa and schmeidler it is shown that the second price auction is more exposed than the first price auction to lost revenue from the introduction of bidder behavior with small payoff errors

asset allocation and individual risk aversion 1992 asset allocation and individual risk aversion financial analysts journal vol 48 no 6 pp 32 37

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

differential pricing parallel trade and the incentive to invest abstract i consider the case for imposing uniform pricing on a monopolist in a setting where markets can be segmented according to differences in marginal costs and or consumer demand i also analyze the ex ante impact on incentives to invest in r d i show how two opposite trade offs arise when differential pricing is demand based uniform pricing has good ex post welfare properties but leads to lower investment ex ante conversely when differential pricing is cost based uniform pricing has bad ex post welfare properties but leads to higher investment ex ante

reference pricing competition and pharmaceutical expenditures theory and evidence from a natural experiment abstract we study the impact of regulation on competition between brand names and generics and pharmaceutical expenditures using a unique policy experiment in norway where reference pricing rp replaced price cap regulation in 2003 for a sub sample of off patent products first we construct a vertical differentiation model to analyze the impact of regulation on prices and market shares of brand names and generics then we exploit a detailed panel data set at product level covering several off patent molecules before and after the policy reform off patent drugs not subject to rp serve as our control group we find that rp significantly reduces both brand name and generic prices and results in significantly lower brand name market shares finally we show that rp has a strong negative effect on average molecule prices suggesting significant cost savings and that patients copayments decrease despite the extra surcharges under rp

parallel imports demand dispersion and international price discrimination parallel imports goods imported by unauthorized resellers are advocated worldwide for undermining international price discrimination for a continuum of markets we find that uniform pricing by a monopolist yields lower global welfare than third degree discrimination if demand dispersion across markets is large though uniform pricing avoids output misallocation too many markets go unserved mixed systems permitting discrimination across but not within designated groups of markets yield significantly higher welfare than uniform pricing or unrestricted multimarket discrimination and can pareto dominate uniform pricing thus while parallel imports might benefit some countries our results weaken the multilateral case for allowing them

the political economy of fema disaster payments a central contribution of public choice theory to the analysis of government activity is in viewing the activities of government not as determined by some single altruistic dictator but rather as the result of a process involving individual political agents who react to the incentives they face federal disaster relief administered by the federal emergency management agency fema is one activity that is ripe for political influence due to the process of disaster declaration and relief after a disaster strikes a particular state the governor makes a request to the president for disaster assistance following a governor s request the president then decides whether to declare the state or region a disaster area only after a disaster has been declared by the president can disaster relief be given fema is in charge of determining the level of relief funding for the area but additional appropriations are determined by congress in cases requiring large amounts of funding beyond fema s allocated budget the act which governs the rules of federal disaster declaration and expenditures gives the president the authority to declare a disaster without the approval of congress

risk preferences and demand drivers of extended warranties we disentangle and study the relative importance of different risk preferences in explaining extended warranty purchases and the high premia paid for them empirical and behavioral research on insurance is at odds with whether diminishing returns curvature of the utility function or loss aversion and nonlinear probability weighting lead to observed consumer behavior this lack of consensus is primarily due to the inability of standard choice data to separate different risk preferences and the consequent need to rely on strong parametric assumptions we design two conjoint studies consistent with simultaneous and sequential decision making with choices about washing machines and extended warranties where subjects are given failure probabilities and repair costs using stated choice data from the surveys we can nonparametrically identify product and risk preferences we find that loss aversion is significantly more important than curvature and probability weights in explaining extended warranty choices importantly failure to decompose risk averse behavior into that arising from curvature loss aversion and probability weighting leads to lower washer prices and profits these findings are robust to alternate reference point assumptions we rationalize the premia paid for warranties by exploring retailer incentives to price discriminate and test the theory on complementary goods pricing finally based on counterfactual analysis forcing separate retailers to sell washers and extended warranties is not necessarily welfare enhancing as cited in the media and previous literature

real wage determination in bangladesh agriculture an econometric investigation thsi paper develops and estimates a real wage model for the agricultural sector in bangladesh for the period 1973 2 1985 4 the model is developed within the framework of the market theory of labour demand and labour supply the empirical results are supportive of the market theory of wages

the impact of parallel imports on investments in cost reducing research and development abstract we develop a two country model of endogenous investment in process innovation by a manufacturer facing competition from parallel imports pi we find that the distortions associated with pi inhibit innovation however the difference between the manufacturer s expected profits under successful and failed innovation is u shaped in the cost of engaging in pi thus the reduction in r d investment depends on both legality of pi and transport costs the reduction in innovation could harm global welfare depending on whether the manufacturer was deterring pi with a high wholesale price if so banning such trade would raise expected welfare

learning and asset prices under ambiguous information we propose a new modeling framework to study the asset pricing implications of learning under ambiguity aversion in a continuous time partial information lucas economy we characterize analytically equilibrium equity returns and make the following observations first learning under ambiguity aversion implies an equilibrium discount for ambiguity if and only if relative risk aversion is below one or equivalently the elasticity of intertemporal substitution eis is above one in this case ambiguity aversion increases conditional equity premia and volatilities second equilibrium interest rates are lower irrespective of risk aversion third no time invariant relation between excess returns and conditional variances exists therefore estimated relations between excess returns and equity conditional variances are highly time varying and have an indeterminate sign fourth estimates of the eis based on standard euler equations for equity returns are strongly downward biased in a setting of learning and ambiguity aversion therefore an eis well above one can be consistent with estimates of eis well below one fifth ambiguity does not resolve asymptotically finally using realistic model parameters we show that a low risk aversion and a moderate amount of ambiguity are consistent with the equity premium the low interest rate and the excess volatility puzzles

a more robust definition of subjective probability the goal of choice theoretic derivations of subjective probability is to separate a decisionmaker s underlying beliefs subjective probabilities of events from their preferences attitudes toward risk classical derivations have all relied upon some form of the marschak samuelson independence axiom or the savage sure thing principle which imply that preferences over lotteries conform to the expected utility hypothesis this paper presents a choice theoretic derivation of subjective probability in a savage type setting of purely subjective uncertainty which neither assumes nor implies that the decisionmaker s preferences over lotteries necessarily conform to the expected utility hypothesis copyright 1992 by the econometric society

rural wages labor supply and land reform a theoretical and empirical analysis land reform is one of the most mentioned of the theoretical policy instruments discussed in the development literature yet relatively little attention has been paid to the wage rate consequences of such a program despite the fact that perhaps more than one half of rural families in a developing country receive a substantial proportion of their income from wage earnings in agriculture one reason for this lacuna may be that the determination of wages and family labor supply in the agricultural sector of ldcs has also been somewhat neglected particularly in the context of a heterogeneous labor force 2 the subsistence or institutional wage models of w arthur lewis john fei and gustav ranis and gerald rodgers for instance offer no theory of how rural wage levels or differentials are set and thus provide little guidance on how wage rates would be affected by changes in land ownership patterns more recently pranab bardhan and t n srinivasan david newbery and clive bell and pinhas zusman who formulate general equilibrium market or bargaining models determining endogenously the rental share paid by tenant sharecroppers have assumed that agricultural wage rates are exogenous or determined only by nonagricultural factors all of these models assume that rural labor is homogeneous another reason why the potential wage impact of a land reform program may have received little attention is that models of peasant family behavior such as those of a k sen dipak mazumdar and robert mabro typically embody two restrictive assumptions which would tend to make the equalization of landholdings appear wage augmenting although this implication has never been formally derived these assumptions are that 1 agriculture is dualistic with small farm families facing lower shadow prices of labor leisure than large farm landlords because of impediments to labor mobility and 2 agricultural households are dichotomous small farmers employ family labor and maximize utility while large farms only utilize wage labor and maximize profits data from a 1970 71 allindia survey of over 5 000 households collected by the national council of applied economic research3 indicate however that almost all cultivator households large and small participate actively in the labor market as either buyers or sellers of labor services with almost 88 percent of households cultivating a gross cropped area less than 1 5 acres utilizing some hired labor seventynine percent of these small farm households associate professor yale ujniversity the research embodied in this paper was supported in part by a grant from the ford and rockefeller foundations program in support of social science and legal research on population policy and with funds from the u s agency for international development under order no aid otr 1432 helpful suggestions and comments were provided by james l mccabe mark gersovitz an anonymous referee the managing editor and members of the economic growth center yale university i am also grateful to the members of the research program in development studies princeton university for the use of their facilities research assistance was provided by james devine anne morgan and roberta robson inotable exceptions are r albert berry mark gersovitz and m a rahman all of these authors however employ geometric analyses with differing assumptions leading to wholly different predictions regarding wage effects none consider the heterogeneity of agricultural labor pay attention to questions of stability or attempt to apply their models to data 2lnformation on the differential impact of alternative agricultural policies including land reform on sex or age specific wage rates is not only important in settling income distribution and equity issues but as suggested in an article by the author and robert evenson may have significant implications for population growth and schooling as well 3for a more detailed discussion of these data see the author

can natural experiments measure behavioral responses to environmental risks efforts to measure people s responses to spatially delineated risks confront the potential for correlation between these risks and other unobserved characteristics of these locations the possibility of correlation arises in part because individuals observe other locational attributes that can be expected to influence the hedonic equilibrium one response to this problem is to use events from nature to exploit both temporal and spatial variation in the behavioral responses of interest this paper evaluates the use of hurricanes as a source of new risk information to households in coastal counties potentially subject to the effects of these storms we study the extent to which housing prices before and after hurricane andrew a hurricane with unprecedented property loss reveal how floridians responded to the risk information provided by the storm two counties are selected one without and another with damage from the hurricane to evaluate the plausibility of using quasi random experiments for locations not directly affected by natural events we compare lee county s results to those of dade county where the majority of the damage occurred our findings suggest after controlling for ex post storm damage and changes in insurance markets there is a reasonably high level of consistency in a repeat sales model s ability to estimate the effects of the risk information conveyed by the storm for both counties

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

what s to know about laboratory experimentation in economics abstract experimental economics has grown as a discipline from near non existence 50 years ago to a full fledged field within economics in the present much of experimental economics research involves experimental methods as a tool applied to problems in other fields of economics however some of this research is inward looking focusing on questions of the methodology of experimental economics in this note i briefly discuss two methodological issues in experimental economics that might benefit from meta analysis the pool from which experimental participants are drawn university undergraduate students versus other populations and the scale of monetary incentives faced by participants large small or hypothetical

alfred marshall lecture intellectual property rights protection in developing countries the case of pharmaceuticals patent enforcement in developing countries generates considerable controversy especially when patents involve potentially life saving drugs this paper argues that common concerns regarding the effects of patents on prices and on research incentives of pharmaceutical multinationals are misplaced rather the most significant effects are likely to concern access to patented drugs in poor countries because prices in developing countries are much lower than in the developed world multinationals may choose to enter such markets with a delay or not at all implying a complete loss of access to patented drugs in developing countries even when multinationals enter countries like india their marketing and distribution networks are not currently built out leading to limited access within the country such considerations may provide a justification for policies targeting access in the short and medium run such as compulsory licensing

changes in implicit flood risk premiums empirical evidence from the housing market abstract hedonic valuation models have shown that sales prices can capitalize property risk factors such as flood zone properties facing lower risk sell at a premium all else being equal previous research has indicated that price differentials reflecting risk of flooding become much larger in the wake of a storm we re examine these findings for pitt county north carolina using multiple storm events within a difference in differences framework and we compare flood zone price differentials for a more recent sample of property sales prior to hurricane fran in 1996 we detect no market risk premium for the presence in a flood zone but we find significant price differentials after major flooding events amounting to a 5 7 decrease after hurricane fran and 8 8 decrease after hurricane floyd results from a separate model that examines more recent data covering a period without significant storm related flood impacts indicate a significant risk premium ranging between 6 0 and 20 2 for homes sold in the flood zone but this effect is diminishing over time essentially disappearing about 5 or 6 years after hurricane floyd the lack of a persistent effect suggests that buyers and sellers risk perceptions may change with the prevalence of hazard events and that homebuyers are unaware of flood risks and insurance requirements when bidding on properties

on endogenous formation of price expectations abstract we study a two period exchange economy with complete financial markets and endogenous borrowing constraints contrary to perfect foresight paradigm we assume that agents are heterogeneous in their ability to forecast future prices we introduce a new equilibrium concept called informationally constrained equilibrium where the formation of price expectations is endogenous and reflects the revelation of information from observing bounds on liabilities designed to ensure solvency at any contingency we prove that under standard assumptions an equilibrium always exists and we characterize the degree of information revealed by the endogenous debt limits

uncertainty aversion in a heterogeneous agent model of foreign exchange rate formation this paper provides what we believe to be the first empirical test of whether investors in the foreign exchange market are uncertainty averse we do this using a heterogeneous agents model in which fundamentalist and chartist beliefs of the exchange rate co exist and are allowed to be either uncertainty neutral or uncertainty averse uncertainty aversion is modelled using the maxmin expected utility approach we find significant evidence of uncertainty aversion in the fx market where in particular fundamentalists are found to be largely uncertainty neutral while chartists are mainly uncertainty averse inclusion of uncertainty averse agents significantly improves the performance of the model

nash equilibrium under knightian uncertainty breaking down backward induction abstract we define nash equilibrium for two person normal form games in the presence of knightian uncertainty using the formalization of schmeidler and gilboa we show that nash equilibrium exists for any degree of uncertainty aversion that maxmin behaviour can occur even when it is not rationalizable in the usual sense and that backward induction breaks down in the twice repeated prisoners dilemma we relate these results to the literature on cooperation in the finitely repeated prisoners dilemma and the literature on epistemological conditions underlying nash equilibrium the knowledge notion implicit in this model of equilibrium does not display logical omniscience journal of economic literature classification numbers c72 d81

choice under uncertainty with the best and worst in mind neo additive capacities the concept of a non extreme outcome additive capacity neo additive capacity is introduced neo additive capacities model optimistic and pessimistic attitudes towards uncertainty as observed in many experimental studies moreover neo additive capacities can be applied easily in economic problems as we demonstrate by examples this paper provides an axiomatisation of choquet expected utility with neo capacities in a framework of purely subjective uncertainty

does federal disaster assistance crowd out flood insurance abstract we empirically analyze whether federal disaster aid crowds out household purchase of disaster insurance we combine data on annual household flood insurance purchases for the united states over the period 2000 2011 with data from the two main u s post disaster federal aid programs fema s individual assistance grants and sba s low interest disaster loans estimating both fixed effects and instrumental variable models to account for the endogeneity of disaster assistance grants we find that receiving individual assistance grants decreases the average quantity of insurance purchased the following year by between 4000 and 5000 the reduction we find is roughly 3 of the mean insurance coverage in the sample but larger than the average flood related ia grant in our sample which is 2984 ia is currently limited and larger grants could have different impacts the crowding out is on the intensive margin we find no impact on take up rates likely because there is a requirement that recipients of disaster aid purchase an insurance policy we do not know how take up rates might change without such a requirement low interest post disaster government loans have no systematic effect on insurance purchases

market failure in information the national flood insurance program the national flood insurance program nfip was established in 1968 and requires mandatory flood insurance for property owners who have federally backed mortgages krutilla 1966 noted that a compulsory national flood insurance program could greatly improve the economic efficiency of flood plain occupancy in the united states however in order to realize the efficiency gains suggested by krutilla property owners must have sufficient information about flood risk and insurance premiums to make well informed home purchase decisions using survey data from boulder colorado we find significant evidence of market failure in information in the nfip program the majority of survey respondents all of whom live in a special flood hazard area report they did not fully understand the degree of flood risk or the cost of insuring against this risk when negotiating the purchase of their property

preference reversals for ambiguity aversion this paper finds preference reversals in measurements of ambiguity aversion even if psychological and informational circumstances are kept constant the reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context dependent weightings of attributes we offer an explanation based on sugden s random reference theory with different elicitation methods generating different random reference points then measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion this paper was accepted by teck ho decision analysis

decision theory under ambiguity we review recent advances in the field of decision making under uncertainty or ambiguity we start with a presentation of the general approach to a decision problem under uncertainty as well as the standard bayesian treatment and issues with this treatment we present more general approaches choquet expected utility maximin expected utility smooth ambiguity and so forth that have been developed in the literature under the name of models of ambiguity sensitive preferences we draw a distinction between fully subjective models and models incorporating explicitly some information we review definitions and characterizations of ambiguity aversion in these models we mention the challenges posed by some of the models presented we end with a review of part of the experimental literature and applications of these models to economic settings

forgetting the flood an analysis of the flood risk discount over time we examine whether property price differentials reflecting flood risk increase following a large flood event and whether this change is temporary or permanent we use single family residential property sales in dougherty county georgia between 1985 and 2004 in a difference in differences spatial hedonic model framework after the 1994 flood of the century prices of properties in the 100 year floodplain fell significantly this effect was however short lived in spatial hedonic models that explicitly incorporate both linear and nonlinear temporal flood zone effects we show that the flood risk discount disappeared between four and nine years after the flood depending upon the specification jel q51 q54

subjective beliefs and ex ante trade we study a definition of subjective beliefs applicable to preferences that allow for the perception of ambiguity and provide a characterization of such beliefs in terms of market behavior using this definition we derive necessary and sufficient conditions for the efficiency of ex ante trade and show that these conditions follow from the fundamental welfare theorems when aggregate uncertainty is absent our results show that full insurance is efficient if and only if agents share some common subjective beliefs our results hold for a general class of convex preferences which contains many functional forms used in applications involving ambiguity and ambiguity aversion we show how our results can be articulated in the language of these functional forms confirming results existing in the literature generating new results and providing a useful tool for applications

valuing low probability risk survey and experimental evidence abstract this study uses a survey question and an economics experiment to elicit the value of a risk mitigation investment for 93 subjects 48 males and 45 females the responses to hypothetical questions are compared with a risk mitigation decision that has a salient outcome we find no gender differentiated responses to either the maximum accepted price in the economics experiment or hypothetical willingness to pay questions from the survey in our design the two procedures generate aggregate measures that were in close agreement however individual decisions were seldom consistent

do seller disclosures affect property values buyer information and the hedonic model the hedonic method is widely used to infer the value of environmental amenities that are bundled with real property the interpretation of hedonic prices as marginal values requires that households are fully informed yet there is evidence that buyers are often less informed than sellers a graphical illustration in this study suggests that asymmetric information between buyers and sellers can affect hedonic prices this intuition is confirmed by a quasi random experiment that exploits spatial and information discontinuities stemming from a seller disclosure for flood zones results suggest a 4 decline in housing prices in flood zones after disclosures commenced

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

ambiguity made precise a comparative foundation the theory of subjective expected utility has been recently extended to allow ambiguity to matter for choice we propose a notion of absolute ambiguity aversion by building on a notion of comparative ambiguity aversion we characterize it for a preference model which encompasses some of the most popular models in the literature we next build on these ideas to provide a definition of unambiguous act and event and show the characterization of the latter as an illustration we consider the classical ellsberg 3 color urn problem and find that the notions developed in the paper provide intuitive answers journal of economic literature classification number d81

welfare improving ambiguity in insurance markets with asymmetric information we consider a model of competitive insurance markets involving both asymmetric information and ambiguity about the accident probability we show that there can exist a full insurance pooling equilibrium we also present an example where an increase in ambiguity leads to a strict pareto improvement higher ambiguity relaxes high risks incentive compatibility constraint and allows low risks to buy more insurance higher ambiguity also deteriorates low risks expected utility from holding an uncertain prospect if the former effect dominates the expected utility of low risks increases and given that high risks utility remains unaffected the increase in ambiguity implies a strict pareto improvement

the effects of imprecise probabilities and outcomes in evaluating investment options vagueness attitudes have been used to explain anomalies and irregularities in investment behavior it is generally assumed ellsberg 1961 that decision makers dms dislike vagueness but this assumption has been challenged by empirical results documenting systematic alternative attitudes to vagueness as a function of its source the domain of the decisions and the response mode used we investigate these three factors in a within subjects design that was embedded in an investment context dms evaluated investment options that varied in terms of their sources of vagueness probabilities and or outcomes in both domains gains or losses and employed two response modes pricing or choice we confirm that individuals vagueness attitudes are malleable contingent on the dimension salience and the reference domain in particular we observed three distinct patterns of reversals of attitudes towards vagueness our results indicate that the ability of vagueness attitudes to predict investment behavior is limited as decisions can be systematically influenced by task context and or perceived gain or loss positions economic models may be improved by incorporating more flexible assumptions about individuals attitudes toward vagueness