welfare with imperfect foreknowledge the case of risk aversion we study the use of discrete choice models in the context of recreation when there may be discrepancy between the anticipated ex ante and the experienced quality of site attributes due to imperfect information unlike previous literature on the topic we relax the assumption of risk neutrality adopting a model with quasi linear preferences we characterize the disparity between ex ante and ex post utility by decomposing expected utility into a term stemming from bias in beliefs and a component representing willingness to pay for reducing uncertainty in site attributes our results show that ex post corrections of welfare losses are attenuated by greater dispersion in beliefs about amenities

welfare economics risk and uncertainty social decisions in risky contexts raise a number of difficult questions such as 1 should social decisions be more or less risk averse than the average person 2 should we try to avoid large catastrophes more than frequent but limited harms with similar expected impact 3 should social decisions be ambiguity averse or stick to the expected utility canon this paper reviews the welfare economics of risk and uncertainty and examines possible answers to these questions based on the pros and cons of utilitarianism ex ante egalitarianism and ex post egalitarianism

global risk investment and emotions we investigate a novel dynamic choice problem in an experiment where emotions are measured through self reports the choice problem concerns the investment of an amount of money in a safe option and a risky option when there is a global risk of losing all earnings from both options including any return from the risky option our key finding is that global risk can reduce the amount invested in the risky option this result cannot be explained by expected utility or by its main contenders rank dependent utility and cumulative prospect theory an explanation is offered by taking account of emotions using the emotion data from the experiment and recent psychological findings

structural estimation and the border puzzle abstract we revisit anderson and van wincoop s anderson james and eric van wincoop 2003 gravity with gravitas a solution to the border puzzle american economic review 93 170 192 claim that structural estimation solves the u s canadian border puzzle we find this claim tenuous as the proposed solution attributes to structural estimation the effects of added u s data and an assumption that u s and canadian border costs are symmetric estimated canadian and u s multilateral resistance measures which are the foundation of anderson and van wincoop s argument depend critically on the symmetric costs assumption even accepting symmetry we show that structurally consistent estimates of the canadian border effect are only marginally smaller than the ols estimates when we exclude the arguably non comparable u s data

a rank dependent utility model of uncertain lifetime abstract in a continuous time life cycle model of consumption with an uncertain lifetime we use a non parametric specification of rank dependent utility theory to characterize the preferences of the agent we prove that time consistency holds for a subclass of probability weighting function providing the foundation for a constant rate of time preference that interacts multiplicatively with the hazard rate instead of additively as in the yaari 1965 seminal model we calibrate both models to explain the hump in the life cycle consumption and show that the multiplicative model is more robust

evaluating decision strategies for equity of public risks many important decisions include the loss of life among their possible consequences alternative actions have different implications for the number of possible fatalities the equity of those eventual fatalities and the equity of the process resulting in those fatalities this paper defines a concept of ex ante risk equity to address the equity of the process and distinguishes this concept from the ex post risk equity of the fatalities the paper indicates that an analysis of decision strategies addresses ex ante equity in this context both types of equity as well as loss of life are included in a von neumann morgenstern utility model developed to evaluate public risks this approach provides a method to investigate the implications of different value judgments in examining alternatives and illustrates an appropriate use of von neumann morgenstern utility for problems involving social consequences such as public risks

the strategic implications of sunk costs a behavioral perspective abstract this paper examines some of the strategic implications of the sunk cost phenomenon in sequential allocation decisions drawing from psychology and behavioral decision theory we first present a taxonomy of possible causes for the sunk cost effect the tendency of many managers to throw good money after bad we then present the analysis of some implications of this behavior in strategic situations a two period strategic game is developed and analyzed to derive optimal allocations as a function of one player s sunk cost behavior we establish when this behavior can be used as a successful precommitment strategy by the sunk cost player and when it is exploitable by an opponent welfare implications are also explored the sunk cost effect constitutes a form of strategic preference manipulation in which a credible preference change can be induced to provide a strategic advantage to one of the players

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

value of parsimonious nutritional information in a framed field experiment abstract this study investigates consumers beliefs about the tastiness and healthiness of 173 food items in a framed field experiment designed to mirror a grocery shopping environment using data collected from 129 food shoppers in grenoble france demand models are estimated to determine how product choice is affected by price taste and perceived healthiness and how choices change with the provision of objective health information unlike previous studies focusing on relatively complex nutrition labels we elicit and convey health information using simple nutritional indices meant to lower search and cognitive processing costs the results indicate that consumers are willing to pay for tastier foods and for healthier foods particularly if the consumers have objective information as opposed to perceived subjective information on nutrient content the estimates suggest that the value of the type of nutritional information provided in the experiment is 0 98 per day the figure refers to the daily welfare benefits that arise from being able to make a set of choices that better reflect people s preferences by receiving the nutrient index information on all 173 food items versus not having such information

social preferences under risk equality of opportunity versus equality of outcome this paper axiomatizes a utility function for social preferences under risk in the model a single parameter captures a preference for equality of opportunity i e equality of exante expected payoffs relative to equality of outcome i e equality of ex post payoffs in a deterministic environment the model reduces to the model of fehr and schmidt 1999 the model is consistent with recent experiments on probabilistic dictator games

stable equilibrium in beliefs in extensive games with perfect information abstract the purpose of this paper is to present a new solution concept of stable equilibrium in beliefs seb by assuming it is common knowledge that players are uncertainty averse in the sense of gilboa and schmeidler 1989 journal of mathematical economics 18 141 153 by making use of an appealing criterion of stability an seb is defined as a strategy profile supported by a stable belief system it is shown that all sebs constitute a unique stable belief system and an seb satisfies subgame perfectness moreover it is shown that the notion of seb refines that of subgame perfect equilibrium in terms of path of play finally following aumann 1995 games and economic behavior 8 6 19 this paper establishes some epistemic foundation for the notion of seb

optimism pessimism and financial bubbles this paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank dependent expected utility this rdu assumption can be viewed as a transformation of probabilities depending on the pessimism optimism of the agent the results show that pessimism favors the existence of deterministic bubbles when optimism may promote the existence of stochastic bubbles moreover under pessimism the rdu assumption may generate multiple bubbly equilibria the rdu assumption also leads to new conditions ensuring the absence of pareto optimality of the competitive equilibrium without bubbles these conditions still govern the existence of bubbles

estimating the effects of free trade agreements on international trade flows using matching econometrics abstract this paper provides the first cross section estimates of long run treatment effects of free trade agreements on members bilateral international trade flows using nonparametric matching econometrics our nonparametric cross section estimates of ex post long run treatment effects are much more stable across years and have more economically plausible values than corresponding ols cross section estimates from typical gravity equations we provide plausible estimates of the long run effects of membership in the original european economic community eec and the central american common market cacm between 1960 and 2000 and the estimates confirm anecdotal reports of these agreements effectiveness

generalized expected utility analysis of risk aversion with state dependent preferences in this paper the author develops measures of absolute risk aversion for preference relations on risky prospects that are state dependent and are representable by frechet differentiable nonlinear functionals a comparative statics analysis of optimal air travel insurance coverage illustrates the usefulness of the proposed measures it is also demonstrated that the analytical framework described above is consistent with the purchase of air travel insurance even in circumstances where expected utility theory is not copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

precautionary principle and the optimal timing of environmental policy under ambiguity i consider a problem in environmental policy design in which i focus on stock pollutants in particular i consider stock pollutants that cause severe damage on the environment and do not depreciate at all once they are released into the atmosphere and the ocean the purposes of this paper are 1 to provide an economic foundation for environmental policies based on the precautionary principle and the 1992 rio declaration on environment and development and 2 to show that this optimal timing rule has a reservation property furthermore i analyze the effect of an increase in ambiguity on the optimal timing of adopting some environmental policy and show that an increase in ambiguity decreases the optimal timing of adopting the environmental policy

rational choice a survey of contributions from economics and philosophy this paper looks at the philosophical foundations of rational choice theory it is argued that l savage s expected utility axioms cannot be defended as requirements of instrumental rationality in part because of their implications for the description of consequences then it is argued that common knowledge of rationality does not imply that rational game players must be in nash equilibrium and for some games is an incoherent concept finally the suggestion that rational choice theory is self defeating is examined in relation to coordination games where the theory cannot explain the role of salience and the concept of resolute choice copyright 1991 by royal economic society

vickrey auctions in the theory of expected utility with rank dependent probabilities abstract when decision makers maximize expected utility with rank dependent probabilities and the object being auctioned is a risky prospect then with independent private value vickrey auctions lose their demand revealing property moreover they might be non pareto optimal

analysis of uncertainty as opposed to risk an experimental approach the paper illustrates the scope for enhancing the conceptual apparatus used by agricultural economists to analyse decision making under conditions of uncertainty selected empirical results from experiments on student subjects from three universities are reported three issues are considered first the reasons for choice and the understanding of a choice problem are examined second attitudes towards different levels of uncertainty are measured third the possibility that apparently non normative psychological factors influence choice is explored the paper serves to illustrate and support a number of methodological points the major points are that a risk uncertainty distinction is useful contrary to the aging conventional wisdom of economic theory that laboratory experiments can potentially provide data of use to agricultural economists and that predictive models of choice under uncertainty may be more accurate if they take account of psychological variables which influence the decision making processes of human subjects

are rta agreements with environmental provisions reducing emissions article i nfo this paper investigates whether rtas with environmental provisions affect relative and absolute pollution levels in order to do so the determinants of carbon dioxide emissions convergence are estimated for a cross section of 182 countries over the period 1980 to 2008 a propensity score matching approach is com bined with difference in differences techniques to effectively isolate the effect of the regional trade agree ment rta variable the usual controls for scale composition and technique effects are added to the estimated model and the endogeneity of income and trade variables is modeled using instruments the main results indicate that the co2 emissions of the pairs of countries that belong to an rta with environmen tal provisions tend to converge and are lower in absolute terms whereas this is not the case for rtas without environmental provisions as regards specific agreements we find that emissions converge more rapidly for nafta than for eu 27 and euro med countries we find consistent evidence that only rtas with environ mental harmonization policies affect relative and absolute pollution levels

failure of blackwell s theorem under machina s generalization of expected utility analysis without the independence axiom abstract considerable evidence suggests that the independence axiom of expected utility theory is not empirically supported in response machina has generalized expected utility theory in such a way that the independence axiom is not required most of the basic concepts and results of expected utility theory still hold under machina s generalization however blackwell s theorem a fundamental result in information economics fails to hold under machina s generalization of expected utility theory without the independence axiom

measuring welfare effects of product contamination with consumer uncertainty abstract a methodology is developed for measuring consumer welfare loss from market demand due to contamination when information is imperfect comparison of behavior before and after awareness permits calculation of the cost of ignorance which occurs when news of contamination is withheld or undiscovered for a time as well as when excessive reporting and exaggeration cause overreaction avoidance costs are also calculated for consumers who consume less than they would with perfect information due to risk aversion the methodology is applied to analyzing the heptachlor crisis which reduced milk consumption in hawaii by over 80

nonparametric test of the expected utility hypothesis a nonparametric test of the expected utility hypothesis is developed in this paper the expected utility hypothesis is shown to hold if there exists a feasible solution to a particular system of linear inequalities furthermore when a feasible solution exists boundaries on the coefficient of absolute risk aversion can be calculated explicitly the test is applied to data on land allocations modeled as choices over lottery sets results contrary to those obtained in many laboratory experiments show that in most cases the expected utility hypothesis cannot be rejected

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

choosing the open sea the cost to the uk of staying out of the euro abstract in this paper we provide an estimate of the trade flows that there would have been between the uk and its main trading partners if the uk had joined the euro as an alternative approach to the standard log linear gravity equation we employ the synthetic control method we show that the aggregate trade flows between britain and eurozone members would have been 16 higher if the uk had adopted the euro we also provide an estimate of the hypothetical euro s effect on trade flows between the uk and non euro countries our results suggest that the adoption of the european currency would also have led to a substantial increase in british trade flows with non euro members finally we provide a new estimate of the euro s trade impact for euro members our results suggest that the adoption of the single currency led to an increase in intra european trade flows of between 19 and 55

can expected utility theory explain gambling we investigate the ability of expected utility theory to account for simultaneous gambling and insurance contrary to a previous claim that borrowing and lending in perfect capital markets rules out a demand for gambles we show that expected utility theory with non concave utility functions can still explain gambling when the rates of interest and time preference are equal agents will seek to gamble unless income falls in a finite set of exceptional values when these rates differ there will be a range of incomes for which gambles are desired in both cases repeated gambling is not explained but market imperfections such as different borrowing and lending rates can account for persistent gambling provided the rates span the rate of time preference

temptation driven preferences my own behaviour baffles me for i find myself not doing what i really want to do but doing what i really loathe saint paulwhat behaviour can be explained using the hypothesis that the agent faces temptation but is otherwise a standard rational agent in earlier work gul and pesendorfer 2001 use a set betweenness axiom to restrict the set of preferences considered by dekel lipman and rustichini 2001 to those explainable via temptation we argue that set betweenness rules out plausible and interesting forms of temptation including some which may be important in applications we propose a pair of alternative axioms called dfc desire for commitment and aic approximate improvements are chosen dfc characterizes temptation as situations in which given any set of alternatives the agent prefers committing herself to some particular item from the set rather than leaving herself the flexibility of choosing later aic is based on the idea that if adding an option to a menu improves the menu it is because that option is chosen under some circumstances from this interpretation the axiom concludes that if an improvement is worse as a commitment than some commitment from the menu then the best commitment from the improved menu is strictly preferred to facing that menu we show that these axioms characterize a natural generalization of the gul pesendorfer representation copyright wiley blackwell

extensive form games with uncertainty averse players abstract nash equilibrium presumes that the beliefs of a player are represented by a probability measure motivated by the ellsberg paradox and relevant experimental findings demonstrating that this representation of beliefs may be unrealistic this paper generalizes nash equilibrium in finite extensive form games to allow for preferences conforming to the multiple priors model developed by gilboa and schmeidler journal of mathematical economics 18 1989 141 153 the implications of this generalization for strategy choices and welfare are studied journal of economic literature classification numbers c72 d81

applied welfare economics with discrete choice models economists have been paying increasing attention to the study of situations in which consumers face a discrete rather than a continuous set of choices such models are potentially very important in evaluating the impact of government programs upon consumer welfare but very little has been said in general regarding the tools of applied welfare economics indiscrete choice situations this paper shows how the conventional methods of applied welfare economics can be modified to handle such cases it focuses on the computation of the excess burden of taxation and the evaluation of quality change the results are applied to stochastic utility models including the popular cases of probit and logit analysis throughout the emphasis is on providing rigorous guidelines for carrying out applied work this abstract was borrowed from another version of this item

environmental valuation with imperfect information the case of the random utility model this paper considers welfare analysis with therandom utility model rum when perceptions ofenvironmental quality differ from objectivemeasures of environmental quality environmental quality is assumed to be anexperience good so that while perceptions ofquality determine choices ex postutility is determined by objective quality given this assumption i derive a measure ofthe welfare impact of changes in environmentalquality and i show how this new welfaremeasure differs from the traditional welfaremeasure developed by hanemann 1982 this newwelfare measure provides an approach tomeasuring the value of information aboutenvironmental quality within the framework ofthe random utility model

one money one market the effect of common currencies on trade currency unions their dramatic effect on international trade a gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade the panel data bilateral observations for five years during 1970 90 covering 186 countries includes 300 observations in which both countries use the same currency i find a large positive effect of a currency union on international trade and a small negative effect of exchange rate volatility even after controlling for a host of features including the endogenous nature of the exchange rate regime these effects statistically significant imply that two countries sharing the same currency trade three times as much as they would with different currencies currency unions like the european emu may thus lead to a large increase in international trade with all that that entails andrew rose

learning in a hedonic framework valuing brownfield remediation incomplete information in property value hedonic models can bias estimates of marginal willingness to pay mwtp using brownfield remediation as an application this article recovers hedonic values from a dynamic neighborhood choice framework that allows households to learn about brownfield contamination in a bayesian fashion before choosing where to live i find that ignoring learning yields nontrivial biases to the mwtp estimate this has important implications for hedonic valuation if agents are imperfectly informed estimates are used to calculate information s value had it been withheld from the public and to assess heterogeneity in information s value along site and homebuyer demographics

sorting over flood risk and implications for policy reform abstract do individuals sort across flood risk this paper applies a boundary discontinuity design to a residential sorting model to provide novel estimates of sorting across flood risk by race ethnicity and income we find clear evidence that low income and minority residents are more likely to move into high risk flood zones we then highlight the overall and distributional implications of proposed price and information reforms to the u s national flood insurance program while such reforms are likely welfare increasing overall heterogeneous behavioral responses yield significant distributive effects that also alter the composition of residents in harm s way

decision making over time and under uncertainty a common approach this paper considers a number of parallels between risky and intertemporal choice we begin by demonstrating a one to one correspondence between the behavioral violations of the respective normative theories for the two domains i e expected utility and discounted utility models we argue that such violations or preference reversals are broadly consistent with three propositions about the weight that an attribute receives in both types of multiattribute choice specifically it appears that 1 if we add a constant to all values of an attribute then that attribute becomes less important 2 if we proportionately increase all values of an attribute or if we change the sign of an attribute from positive to negative then that attribute becomes more important the generality of these propositions as well as the constraints they would impose on separable representations of multiattribute preferences is discussed

the wto trade effect this paper reexamines the gatt wto membership efiect on bilateral trade ows using nonparametric methods including pair matching permutation tests and a rosenbaum 2002 sensitivity analysis together these methods provide an estimation framework that is robust to misspeciflcation biases allows general forms of heterogeneous treatment efiects and addresses potential hidden selection biases this is in contrast to most conventional parametric studies on this issue our results suggest large gatt wto trade promoting efiects robust to various restricted matching criteria alternative indicators for gatt wto involvement different matching methodologies non random incidence of positive trade ows and inclusion of multilateral resistance terms

many good choice axioms when can many good lotteries be treated as money lotteries abstract without the independence axiom a weaker substitution axiom adi is necessary for the preferences over money lotteries induced by the money metric utility function to be well behaved given adi the agent s preferences over many good lotteries can be reconstructed from knowledge of preferences over money lotteries and over sure multivariate outcomes moreover other substitution properties of underlying many good lottery preferences are inherited by the money lottery preferences we analyze the formal and intuitive nature of adi and conclude that analysis of choice under uncertainty without adi cannot be one dimensional

dynamic choice and the common ratio effect an experimental investigation the common ratio effect is a well attested violation of expected utility theory this paper uses four principles of dynamic choice to characterise alternative theoretical strategies for explaining the effect it reports an experiment which tests these principles and by implication several well known accounts of the common ratio effect unlike previous work the experimental design uses real financial incentives without presupposing any dynamic choice principles we find violation of a principle of timing independence which is part of most existing theories of dynamic choice we examine the implications of this finding for decision theory and economics

changing tastes and effective consistency in a single commodity setting with changing tastes an individual s consumption plan can be obtained using naive or sophisticated choice we provide two sufficient conditions for when the solutions are unique and agree and the common plan is representable by a non changing tastes utility because the solution is not revised over time the plan and associated preferences are referred to as being effectively consistent afriat style revealed preference tests are derived the assumption of effective consistency can mitigate the problems of vulnerability to dutch books non existence of a competitive equilibrium and the aggregation of heterogeneous agents with changing tastes abstract from author

welfare maximization entices participation abstract we consider randomized public good mechanisms with optional participation preferences over lotteries are modeled using skew symmetric bilinear ssb utility functions a generalization of classic von neumann morgenstern utility functions we show that every welfare maximizing mechanism entices participation and that the converse holds under additional assumptions as a corollary we obtain a characterization of an attractive randomized voting rule that satisfies condorcet consistency and entices participation this stands in contrast to moulin s well known no show paradox j of econ theory 45 53 64 1988 which shows that no deterministic voting rule can satisfy both properties simultaneously

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

making book against oneself the independence axiom and nonlinear utility theory an individual with known preferences over lotteries can be led to accept random wealth distributions different from his initial endowment by a sequential process in which some uncertainty is resolved and he is offered a new lottery in place of the remaining uncertainty this paper examines the restrictions that can be placed on an individual s preferences by axioms that stipulate that such a process not be able to generate a new wealth distribution that is prima facie inferior to the original the relationship of these axioms to the independence axiom of von neumann and morgenstern and to the quasi convexity of preferences in the wealth distribution are explored

cumulative prospect theory option returns and the variance premium the variance premium and the pricing of out of the money otm equity index options are major challenges to standard asset pricing models we develop a tractable equilibrium model with cumulative prospect theory cpt preferences that can overcome both challenges the key insight is that the variance premium can be written as the expected return on a portfolio of otm call and put options and the probability weighting feature of cpt can explain the puzzlingly low returns observed for these options using gmm on a sample of u s index option returns between 1996 and 2010 we show that the cpt model ts well observed option prices and therefore the variance premium in a dynamic setting probability weighting and time varying equity return volatility combine to match the observed time series pattern of the variance premium

perceptions versus objective measures of environmental quality in combined revealed and stated preference models of environmental valuation abstract this study examines perceptions and objective attribute measures in discrete choice models of recreation site choice behavior these forms of attribute measurement are examined in individual and combined revealed preference stated preference models our results suggest that the model based on perceptions slightly outperforms the models based on objective attribute measures however issues such as the definition of the choice set and the measurement of welfare present significant challenges when using perceptions data

violations of belief persistence in dempster shafer equilibrium abstract belief persistence is a standard rationality axiom in formal models of belief change it requires that new information be accommodated with the smallest possible change to existing beliefs this note shows that violations of belief persistence are possible in j eichberger and d kelsey s 1999a signalling games with uncertainty unpublished university of birmingham 1999b in beliefs interactions and preferences in decision making m j machina and b munier eds pp 135 157 dordrecht kluwer academic dempster shafer equilibrium dse a solution concept for signaling games based on choquet expected utility such violations may lead to implausible equilibria so a refinement of dse is proposed journal of economic literature classification numbers c72 d81

disappointment and dynamic consistency in choice under uncertainty the central proposition of disappointment theory is that an individual forms expectations about uncertain prospects and that if the actual consequence turns out to be worse than or better than that expectation the individual experiences a sensation of disappointment or elation generating a decrement or increment of utility which modifies the basic utility derived from the consequence by incorporating a simple disappointment elation function into a model of individual choice many observed violations of conventional expected utility axioms including violations of savage s sure thing principle and the isolation effect can be predicted and defended as rational and dynamically consistent behaviour

the impact of restaurant calorie labels on food choice results from a field experiment i introduction in 2009 americans spent 42 of their food dollars on meals away from home morrison mancino and variyam 2011 consumers choose to eat outside the home for a variety of reasons but there is mounting concern that this spending pattern will have a detrimental effect on americans diet and overall health todd mancino and lin 2010 estimated that for each additional meal eaten away from home consumers ate an additional 134 calories by their estimation the average person will gain two pounds each year just by eating out one meal a week not only does food away from home tend to be higher in calories its nutrient quality pales in comparison to meals prepared in the home todd mancino and lin 2010 the combined increases in eating away from home and u s obesity overweight rates have caught the attention of policymakers in an effort to help promote healthier food choices several cities counties and states have passed or are considering legislation which would require nutrition labeling on restaurant menus cspi 2010 with the passage of the 2010 healthcare bill a standardized menu labeling system will soon be required in chain restaurants and vending machines across the country the labeling guidelines currently being set by the food and drug administration fda will take precedence over local labeling laws although the specific guidelines have not been released they were expected to be released by the end of 2011 but have still not been finalized to date it is probable that chain restaurants those with 20 or more outlets will be required to provide 1 calorie information for all menu items on all menus menu boards food tags and drive throughs 2 additional nutrition information for all menu items available upon request and 3 a statement of the recommended daily caloric intake 2 000 calories day for the average individual however vending machines will only be required to post calorie counts for all items fda 2011 while the literature on menu labeling in restaurants is growing large gaps in knowledge remain this research was designed to fill many of these gaps by explicitly calculating the value of information voi present in two types of calorie labels using data collected from a field experiment in which restaurant diners were unaware of the ongoing study the innovativeness of our approach can be seen by briefly surveying the existing literature on the topic past research on the effectiveness of nutrition labeling has been remarkably inconclusive both in grocery store see moorman ferraro and huber 2012 for a discussion and restaurant settings some studies concluded that providing nutritional information on restaurant menus lowers caloric intake e g milich anderson and mills 1976 roberto et al 2010 wisdom downs and loewenstein 2010 yet other studies found that the information has no effect e g elbel et al 2009 finkelstein et al 2011 harnack et al 2008 mayer et al 1987 schwartz et al 2012 even among studies finding an effect the size of the effect tended to be small for example balfour et al 1996 and yamamoto et al 2005 found that only a small proportion of consumers 16 and 29 respectively changed their menu item selection when presented with nutrition information importantly no previous studies have provided an estimate of the economic value of nutritional information on restaurant menus which could be used in a cost benefit analysis one of the primary weaknesses of previous research relates to external validity in particular many of the previous studies were conducted in artificial settings where participants were aware of the on going research the earliest studies on restaurant menu labeling were not actually conducted in restaurants but in laboratory or cafeteria settings balfour et al 1996 cinciripini 1984 harnack et al 2008 mayer et al 1987 milich anderson and mills 1976 roberto et al

the erosion of colonial trade linkages after independence high trade between countries with colonial ties may be explained by government policies that establish preferential access or as a consequence of networks formed through social interactions using bilateral trade data from 1948 to 2003 we examine the eect of independence on post colonial trade the severing of formal colonial relations can lead to an immediate reduction in trade as preferential access is eliminated as well as a gradual reduction corresponding to the deterioration of trading networks our results reveal that independence reduces colonial trade with its colonizer metropole the reduction cumulates over a 30 year period and the disruption is particularly severe for hostile separations we also find that overall colonial trade falls subsequent to independence but to a lesser extent than trade with the metropole

winners and losers from the uro abstract using the synthetic control method this paper estimates the effect of having joined the monetary union on the income per capita of six early adopters of the euro our estimates suggest that while the income per capita of belgium france germany and italy would have been higher without the euro that of ireland would have been considerably lower in contrast the netherlands would have been as well off without the euro we show that these estimates are not contingent on our choice of baseline control groups growth predictors and pre treatment period in addition we use the insights from the literature on the economic determinants of the costs and benefits of monetary unions to explain our estimates we find that early euro adopters with a business cycle more synchronized to that of the union and more open to intra union trade or migration lost less or gained more from the euro a key role in increasing post euro income losses of union members has been played by the integration of capital markets

do we really know that the wto increases trade comment in a recent article in the american economic review andrew k rose 2004 finds that countries belonging to the general agreement on tariffs and trade gatt and its successor the world trade organization wto did not trade more than countries that abstained from membership a vast literature on the gatt and the wto presupposes that these organizations were important but until rose there were few systematic efforts to test the assumption that membership increased trade rose s contribution is striking because he assembles a large dataset performs a myriad of analyses and uncovers scant evidence that the gatt and the wto had any impact rose describes his negative findings as an interesting mystery 112 the solution to this mystery lies in understanding who actually participated in the gatt we show that rose has overlooked a large proportion of countries to which the agreement applied and mistakenly classified them as nonparticipants when in fact they had rights and obligations under the agreement this causes a downward bias in his estimates of the gatt s effect on trade because his gravity regressions

equilibrium without independence abstract because players whose preferences violate the von neumann morgenstern independence axiom may be unwilling to randomize as mixed strategy nash equilibrium would require a nash equilibrium may not exist without independence this paper generalizes nash s definition of equilibrium retaining its rational expectations spirit but relaxing its requirement that a player must bear as much uncertainty about his own strategy choice as other players do the resulting notion equilibrium in beliefs is equivalent to nash equilibrium when independence is satisfied but exists without independence this makes it possible to study the robustness of equilibrium comparative statics results to violations of independence

prospect theory in a dynamic game theory and evidence from online pay per bid auctions abundant evidence exists that expected utility theory does not adequately describe decision making under risk although prospect theory is a popular alternative it is rarely applied in strategic situations in which risk arises through individual interactions this study fills this research gap by incorporating prospect theory preferences into a dynamic game theoretic model using a large field data set from multiple online pay per bid auction sites the authors empirically show that their proposed model with prospect theory preferences makes a better out of sample prediction than a corresponding expected utility model prospect theory also provides a unified explanation for two behavioral anomalies average auctioneer revenues above current retail prices and the sunk cost fallacy the empirical results indicate that bidders are loss averse and overweight small probabilities such that the expected revenue of the auction exceeds the current retail price by 25 46 the authors illustrate and empirically confirm a managerial implication for how an auctioneer can increase revenue by changing the details of the auction design

self confirming equilibrium rium path of play thus if a self confirming equilibrium occurs repeatedly no player ever observes play that contradicts his beliefs even though beliefs about play at off path information sets need not be correct we characterize the ways in which self confirming equilibria and nash equilibria can differ and provide conditions under which self con firming equilibria correspond to standard solution concepts nash equilibrium and its refinements describe a situation in which i each player s strategy is a best response to his beliefs about the play of his opponents and ii each player s beliefs about the opponents play are exactly correct we propose a new equilibrium concept self confirming equilibrium that weakens condition ii by requiring only that players beliefs are correct along the equilibrium path of play thus each player may have incorrect beliefs about how his opponents would play in contingencies that do not arise when play follows the equilibrium and moreover the beliefs of different players may be wrong in different ways the concept of self confirming equilibrium is motivated by the idea that noncooperative equilibria should be interpreted as the outcome of a learning process in which players revise their beliefs using their observations of previous play suppose that each time the game is played the players observe the actions chosen by their opponents but that players do not observe the actions their opponents would have played at the information sets that were not reached along the path of play then if a self confirming equilibrium occurs repeatedly no player ever observes play that contradicts his beliefs so the equilibrium is self confirming in the weak sense of not being inconsistent with the evidence by analogy with the literature on the bandit problem e g rothschild 1974 one might expect that a non nash self confirming equilibrium can be the outcome of plausible learning processes this point was made by fudenberg and

food scares in an uncertain world we develop a model that explains the stylized facts of food scares an immediate and sharp decline in consumption of the product followed by a slow and frequently partial recovery of demand after the scare passes the model is used in conjunction with the natural experiment afforded by the mad cow crisis to elicit empirical information on decision makers perception of uncertainty our theoretical and quantitative results suggest that observed behavior is consistent with sharp changes in beliefs and the presence of knightian uncertainty as measured by the degree of imprecision in our model

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

currency unions and trade how large is the treatment effect currency unions and trade what can the data say the impact of a common currency on trade can be grossly mismeasured if countries that belong to currency unions are systematically different from those that do not and if the relationship between trade and its observable determinants is complex i argue that such complications are plausible and likely to distort the empirical results of a recent economic policy paper by andrew rose issue 30 2000 pp 7 45 using techniques designed to be robust in this situation i find that the effects of common currency on international trade are considerably less dramatic and much less precisely estimated torsten persson i have always maintained that the measured effect of a single currency on trade appears implausibly large but i am not convinced by torsten persson s diagnosis and proposed solution i apply a variety of estimation techniques to a new larger data set where many more instances of currency union creation and abandonment make it possible to rely on time series as well as cross sectional evidence the results are similar to my earlier ones the effect of a single currency on trade is large andrew rose

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

do non expected utility choice patterns spring from hazy preferences an experimental study of choice errors individuals often have only incompletely known preferences when choosing between pair wise gambles particular presentations of the choice problem may then passively encourage the use of some choice method to clarify the preference different presentational displays can then lead to choice patterns predicted by one or other generalised expected utility theory when a preference is not or cannot be constructed choices will be arbitrary i run an experiment that uses three different presentational displays and incorporates a strength of preference indicator the experiment investigates regret theory as an example of a generalised expected utility theory as preference strength is found to vary by display regret effects event splitting effects and choice reversals are all found to be display dependent it is suggested that the evidence is best explained by assuming incomplete eu preferences which are clarified by constructive heuristics rather than some generalised expected utility model coupled with an error term

cost benefit analyses versus referenda we consider a planner who chooses between two public policies and ask whether a referendum or a cost benefit analysis leads to higher welfare we find that a referendum leads to higher welfare than a cost benefit analysis in a common value environment cost benefit analysis is better in a private value environment

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

dynamically consistent voting rules abstract this paper studies preference aggregation in a dynamic choice context voters face menus of options in stages and the source of dynamics is that menus possibly get smaller across each stage we call the family of stage voting rules dynamic voting rules and provide an axiomatic characterization on the domain of single peaked preferences of dynamic voting rules that are strategy proof and satisfy a second property inspired from choice theory which we call dynamic consistency

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

correlated nash equilibrium abstract we modify the epistemic conditions for nash equilibrium only to accommodate gilboa and schmeidler s i gilboa d schmeidler maxmin expected utility with nonunique prior j math econ 18 1989 141 153 maxmin expected utility preferences and identify the equilibrium concept in n player strategic games that characterizes the modified epistemic conditions the epistemic characterization supports the equilibrium concept as a minimal generalization of nash equilibrium in the sense that it deviates from nash equilibrium only in terms of players attitude towards ambiguity consequently comparing it with nash equilibrium constitutes a ceteris paribus study of the effects of ambiguity on how a game is played for example with ambiguity beliefs about action choices are in general correlated

testing risklove in an experimental racetrack abstract this paper tests the asch quandt betting hypothesis which accounts for the ubiquitous underbetting overbetting favourite longshot phenomenon found at most racetracks by postulating that horserace wagering is a consumption activity an experimental racetrack was designed with only off track betting permissible thereby eliminating much or all of the consumption involved but the basic anomaly remained and in a somewhat stronger form it is hypothesized that the observed betting behaviour of our subjects is consistent with prospect theory and its two outcome equivalent rank dependent expected utility theory

a model of casino gambling we show that prospect theory offers a rich theory of casino gambling one that captures several features of actual gambling behavior first we demonstrate that for a wide range of preference parameter values a prospect theory agent would be willing to gamble in a casino even if the casino offers only bets with no skewness and with zero or negative expected value second we show that the probability weighting embedded in prospect theory leads to a plausible time inconsistency at the moment he enters a casino the agent plans to follow one particular gambling strategy but after he starts playing he wants to switch to a different strategy the model therefore predicts heterogeneity in gambling behavior how a gambler behaves depends on whether he is aware of the time inconsistency and if he is aware of it on whether he can commit in advance to his initial plan of action this paper was accepted by brad barber teck ho and terrance odean special issue editors

sequential two player games with ambiguity if players beliefs are strictly non additive the dempster shafer updating rule can be used to define beliefs off the equilibrium path we define an equilibrium concept in sequential two person games where players update their beliefs with the dempster shafer updating rule we show that in the limit as uncertainty tends to zero our equilibrium approximates bayesian nash equilibrium by imposing context dependent constraints on beliefs under uncertainty

the integration of claims to health care a programming approach the paper contributes to the use of social choice and welfare theory in health economics by developing and applying the integration of claims framework to health care rationing related to sen s critique of neo classical welfare economics the integration of claims framework recognises three primitive sources of claim consequences deontology and procedures a taxonomy is presented with the aid of which it is shown that social welfare functions reflecting these claims individually or together can be specified some of the resulting social choice rules can be regarded as generalisations of health maximisation and all have normative justifications though the justifications may not be universally acceptable the paper shows how non linear programming can be used to operationalise such choice rules and illustrates their differential impacts on the optimal provision of health care following discussion of relations to the capabilities framework and the context in which rationing occurs the paper concludes that the integration of claims provides a viable framework for modelling health care rationing that is technically rigorous general and tractable as well as being consistent with relevant moral considerations and citizen preferences

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

risk preferences are not time preferences risk and time are intertwined the present is known while the future is inherently risky this is problematic when studying time prefer ences since uncontrolled risk can generate apparently present biased behavior we systematically manipulate risk in an intertemporal choice experiment discounted expected utility performs well with risk but when certainty is added common ratio predictions fail sharply the data cannot be explained by prospect theory hyperbolic discounting or preferences for resolution of uncertainty but seem consistent with a direct preference for certainty the data suggest strongly a difference between risk and time preferences jel c91 d81 d91 understanding individual decision making under risk and over time are two foundations of economic analysis 1 in both areas there has been research to suggest that standard models of expected utility eu and exponential discounting are flawed or incomplete regarding time experimental research has uncovered evidence of a present bias or hyperbolic discounting frederick loewenstein and o donoghue 2002 regarding risk there are number of well documented departures from eu such as the allais 1953 common consequence and common ratio paradoxes an organizing principle behind expected utility violations is that they seem to arise as so called boundary effects where certainty and uncertainty are combined camerer 1992 harless and camerer 1994 and starmer 2000 indicate that violations of expected utility are notably less prevalent when all choices are uncertain this observation is especially interesting when considering decisions about risk taking over time in particular certainty and uncertainty are combined in intertemporal decisions the present is known and certain while the future is inherently risky this observation is problematic if one intends to study time preference in isolation from

contingent portfolio programming for the management of risky projects methods for selecting a research and development r d project portfolio have attracted considerable interest among practitioners and academics this notwithstanding the industrial uptake of these methods has remained limited partly because of the difficulties of capturing relevant concerns in r d portfolio management motivated by these difficulties we develop contingent portfolio programming cpp which extends earlier approaches in that it i uses states of nature to capture exogenous uncertainties ii models resources through dynamic state variables and iii provides guidance for the selection of an optimal project portfolio that is compatible with the decision maker s risk attitude although cpp is presented here in the context of r d project portfolios it is applicable to a variety of investment problems where the dynamics and interactions of investment opportunities must be accounted for

irrationality and ambiguity in extensive games abstract based on a model where deviations from equilibrium play are assumed to identify irrational players who are characterized by ambiguous set valued strategies this paper introduces an equilibrium notion for extensive games with ambiguity averse players that yields a precise interpretation for the counterfactual reasoning usually associated with backward induction the resulting equilibria are always nash equilibria but may not satisfy the conditions required for various refinements of nash equilibrium including those for subgame perfection existence of such equilibria is proved for all two player games and for n player games with perfect information

the dynamic effects of currency union on trade abstract the response of trade to a monetary union is a dynamic process an empirical study of the european monetary union finds that the extensive margin of trade in new goods responded several years ahead of emu implementation and ahead of overall trade volume a dynamic rational expectations trade model shows that early entry of new firms in anticipation is explainable as a rational forward looking response to news the model helps identify which types of trading frictions are reduced by a currency union and shows how new entry can be affected by uncertainty about emu

costly predation and the distribution of competence an evolutionary game model shows how an equilibrium distribution of competence may evolve when members of a population prey on one another but when predatory competence is costly to acquire under one interpretation the competence distribution is an endogenously determined distribution of bounded rationality an example shows how tricksters and suckers might coexist in the long run the analysis leads to a curious result about a mixed equilibrium for a symmetric zero sum game an increase in the costs of one or more competence levels has exactly zero effect on the fraction of the population at those levels