spatial competition in the network television industry we present an empirical study of spatial competition and a methodology to estimate demand for products with unobservable characteristics using panel data we estimate a discrete choice model with latent product attributes and unobserved heterogeneous consumer preferences our application of the methodology to the network television industry yields estimates that are consistent with experts views given our estimates we compute nash equilibria of a product location game and find that firms observed strategies such as the degree of product differentiation are generally optimal discrepancies between actual and optimal strategies reflect the networks adherence to rules of thumb and possible bounded rationality behavior copyright 2001 by the rand corporation

not all rivals look alike estimating an equilibrium model of the release date timing game a very serious game of strategy is at work a cross between chess and chicken which studio distribution chiefs play year round but with increasing intensity during the summer and holiday release period new york times december 6 1999 hubris hubris if you only think about your own business you think i ve got a good story department i ve got a good marketing department we re going to go out and do this and you don t think that everybody else is thinking the same way in a given weekend in a year you ll have five movies open and there s certainly not enough people to go around joe roth chairman of walt disney studios answering a question about the large number of major movies opening within days of each other los angeles times december 31 1996 i introduction the number of americans who go to the movies varies dramatically over the course of the year and sometimes more than doubles within a period of two weeks at the same time the first week accounts for almost 40 of the box office revenues of the average movie the combination of these two facts makes the timing of launching a new movie a major focus of attention for distributors of movies with virtually no subsequent price competition the movie s release date is one of the main short run vehicles by which studios compete with each other in this paper i develop and estimate a model of discrete games which allows me to analyze this release date timing game most empirical industry studies focus on price and quantity competition taking other product characteristics as given in many industries however prices play a very small role and competition is channeled through other product attributes the entertainment industry is a prime example competition among movies television programs or broadway shows is on nonmonetary product attributes such as content advertising and time therefore understanding competition in such industries requires a model that endogenizes some of these product attributes especially those that can be changed in the short run this paper provides a framework in which release decisions can be endogenized and nonprice competition can be analyzed the absence of price competition is useful because it allows the focus of the analysis to be on the timing dimension without relying on assumptions about the nature of the postrelease price competition 1 together with the frequent timing decisions associated with different movies this makes the motion picture industry quite attractive for empirical analysis of the timing game this industry however is not the only example in which timing decisions play a central role similar timing considerations are also important in the release decisions of books compact disks and other new products as well as in the scheduling decisions of major events television programs flight schedules and promotional sales 2 when taking on a new project distributors of movies typically plan for a friday release which falls within a relatively short window of time carefully chosen to match the type of the movie this makes the choice of the release date a very discrete one the exact friday within the season is generally determined by a strategic timing game played among distributors before each release season distributors scramble to release their movies on big holiday weekends when demand is high when doing so each distributor tries to release on the attractive holiday weekend and at the same time to deter competitors from doing the same the extent to which distributors are successful in doing so largely depends on the quality of the movies at their disposal and on the way they can compete with movies released by other studios thus modeling this timing game must account for the asymmetries among movies and for the variation in these asymmetries across release seasons specifically i develop and estimate a sequential move game with private information i assume that the observed release date decisions are the equilibrium outcome of such a game

prices and the winner s curse we usually assume that increases in supply allocation by rationing and exclusion of potential buyers reduce prices but all these activities raise the expected price in an important set of cases when common value assets are sold furthermore when we make the assumptions needed to rule out these anomalies for symmetric buyers small asymmetries among the buyers necessarily cause the anomalies to reappear our results help explain rationing in initial public offerings and outcomes of spectrum auctions we illustrate our results in the wallet game and in another new game we introduce the maximum game

ill health savings and portfolio choices in developing economies abstract this paper examines the effect of adult health on the savings and portfolio decisions of rural pakistani households it also tests whether such effects result because ill health affects income and the rates of return on specific assets by so doing it provides evidence on the sensitivity of savings to income changes and to interest rates i find that expectations of future ill health increase overall savings but reduce investments in productive assets thereby forging a link between health and poverty i also find that the number of males in a household condition the impact of the ill health of any given individual on savings outcomes

corporate conservatism and relative compensation this paper demonstrates that in a simple setting with managerial concern for reputation and asymmetric information on ability most managers may refrain from undertaking innovations that stochastically dominate an industry standard common components of uncertainty lead to market inferences of managerial ability based on relative performance managers who undertake the industry standard are consequently evaluated with a more accurate benchmark than those innovating discontinuities in compensation when performance is low because of firings lead managers to have differing valuations of an accurate benchmark depending on type in particular very high and very low ability managers are more likely to undertake superior innovations than those of average ability

endogenous lifetime and economic growth abstract endogenous mortality is introduced in a two period overlapping generations model probability of surviving from the first period to the next depends upon health capital that is augmented through public investment high mortality societies do not grow fast since shorter lifespans discourage savings development traps are possible productivity differences across nations result in persistent differences in capital output ratios and relatively larger gaps in income and mortality high mortality also reduces returns on education where risks are undiversifiable when human capital drives economic growth countries differing in health capital do not converge to similar living standards threshold effects may also result

alleviating transitory food crises in sub saharan africa international altruism and trade the donor community has responded to unexpected or transitory drops in domestic food production in many countries in sub sabaran africa an empirical framework estimates and analyzes the correlation between this food aid and domestic production both emergency food aid and commercial imports are used to offset the effects of negative output shocks in sub saharan african countries the major recipients of global emergency food aid on average every one ton drop in cereal production is offset by the delivery of 0 8 tons of cereal and dairy products from abroad over four years most food aid arrives within a year of a shock and correlation of shocks over time along with the differences between crop years and calendar years may explain the link between aid and production the economic and political considerations also determine the global response to the emergency food needs of countries in africa the international response is not contingent on the form of government or the level of political and human rights violations poorer countries and those with well established nonemergency food aid programs receive larger amounts of emergency aid when needed food aid has long helped low income countries to sustain domestic food supplies and cope with transitory food insecurity and it has also been used to accelerate agricultural development and increase food production but food aid has been heavily criticized in the past decade on several grounds first it has been charged that the international response to food crises is slow meager and inefficient a related accusation suggests that countries granting emergency food aid disciriminate on the basis of the political and economic orientation of the recipient country second food aid has been thought to discourage domestic food production thus leading to long term dependence on donors finally it has

survival of the gene intergenerational transfers and precautionary saving abstract this paper provides a model of bequest and investment in children s human capital at low incomes it posits that parents and children are linked through their common concern of grandchildren and intergenerational transfers provide a material basis for the perpetuation of the family line the model characterizes intergenerational strategic interactions in a dynamic game theoretical framework moreover it explores intergenerational uncertainty as a source of precautionary saving in contrast with the existing literature the model implies that there are qualitative differences between precautionary saving from one s own income uncertainty and precautionary bequests from children s income uncertainty

the impact of microcredit programs on self employment profits do noncredit program aspects matter microcredit programs provide a two tiered approach to poverty alleviation credit for the purchase of capital inputs in order to promote self employment and noncredit services and incentives these noncredit aspects may be an important component of the success of microcredit programs however because they are costly to deliver and their contribution to the success of the programs is difficult to measure they may not be properly valued this paper uses primary data on household participants and nonparticipants in grameen bank and two similar microcredit programs to measure the total and noncredit effects of microcredit program participation on productivity the total effect is measured by estimating a profit equation and the noncredit effect by estimating the profit equation conditional on productive capital productive capital and program participation are treated as endogenous variables in the analysis i find large positive effects of participation and the noncredit aspects of participation on self em

choice by sequential procedures article history we propose a rule of decision making the sequential procedure guided by routes and show that three influential boundedly rational choice models can be equivalently understood as special cases of this rule in addition the sequential procedure guided by routes is instrumental in showing that the three models are intimately related we show that choice with a status quo bias is a refinement of rationalizability by game trees which in turn is also a refinement of sequential rationalizability thus we provide a sharp taxonomy of these choice models and show that they all can be understood as choice by sequential procedures

agricultural household models extensions applications and policy this book presents the basic model of an agricultural household that underlies most of the case studies undertaken so far the model assumes that households are price takers and is therefore recursive the decisions modeled include those affecting production and the demand for inputs and those affecting consumption and the supply of labor comparative results on selected elasticities are presented for a number of economies the empirical significance of the approach is demonstrated in a comparison of models that treat production and consumption decisions separately and those in which the decisionmaking process is recursive the book summarizes the implications of agricultural pricing policy for the welfare of farm households marketed surplus the demand for nonagricultural goods and services the rural labor market budget revenues and foreign exchange earnings in addition it is shown that the basic model can be extended in order to explore the effects of government policy on crop composition nutritional status health saving and investment and to provide a more comprehensive analysis of the effects on budget revenues and foreign exchange earnings methodological topics primarily the data requirements of the basic model and its extensions along with aggregation market interaction uncertainty and market imperfections are discussed the most important methodological issues the question of the recursive property of these models is also discussed

nutritional status during an economic crisis evidence from russia between 1996 and 1998 russia experienced a spectacular decline in economic activity which was followed by a dramatic rebound between 1998 and 2000 we use panel data to examine the impact of variation in household resources on six dimensions of nutritional status distinguishing longer run from short term fluctuations in resources nutritional status is very resilient to short term variation in household resources gross energy intake adult weight and child stature change very little as expenditure deviates from its long run average longer run resources have a substantively large positive and significant effect on energy intake diet quality adult weight and child stature the evidence indicates that individuals and households are able to weather short term fluctuations in economic resources at least in terms of maintaining body mass and energy intake increased globalisation has resulted in many less developed countries becoming more integrated into world markets this integration carries both benefits and costs for the populations of those countries an oft cited cost is elevated risk of exposure to economic fluctuations which has been manifest in several spectacular economic crises across the globe in the last few decades there is however little evidence on the extent to which individuals and families are able to mitigate deleterious effects of these economic upheavals on their well being in spite of its importance for understanding the consequences of globalisation this article provides new evidence on this issue specifically we examine the relationship between several dimensions of nutritional well being and variation in household resources during the russian economic crisis in the late 1990s the economies of the former soviet bloc have been especially volatile since the transition to market based economies which began in the early 1990s nowhere has this been more true than in russia where in the last half of 1998 real gdp collapsed by around 30 and then rapid growth brought the economy back to its pre crisis level by 2000 the time path of changes in gdp is closely mimicked by changes in the incomes and expenditures of russian households using extremely rich longitudinal household survey data from the russian longitudinal monitoring survey rlms we examine the impact of these large fluctuations in household resources on nutrient intake and on anthropometric markers of nutritional status at the individual level in so doing we address an important issue in the literature regarding the extent to which households in low income settings are able

the competitive dynamics of new dvd releases we study the market for new movie dvds in the united states our demand model captures seasonality freshness i e time between theatrical and dvd release and state dependence we also develop a structural model of dynamic competition in which studios balance waiting for high demand weeks against reduced freshness and against competitive crowding we find that studios emphasize dvd revenues from larger movies by theatrical revenue over dvd revenues from smaller movies studios also emphasize revenue from consumers who prefer larger and fresher movies these behaviors are consistent with managerial conservatism studio executives forgo dvd revenues from smaller movies to ensure the dvd success of larger movies this paper was accepted by j miguel villas boas marketing

competition and price variation when consumers are loss averse we modify the salop 1979 model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase consumers sensitivity to losses in money increases the price responsiveness of demand and hence the intensity of competition at higher relative to lower market prices reducing or eliminating price variation both within and between products when firms face common stochastic costs in any symmetric equilibrium the markup is strictly decreasing in cost even when firms face different cost distributions we identify conditions under which a focal price equilibrium where firms always charge the same focal price exists and conditions under which any equilibrium is focal

empirical research on discrete choice game theory models of entry an illustration abstract we discuss the empirical implementation of discrete game theoretic models of firm entry after presenting a simple model of entry that underlies much of existing empirical analysis we discuss the major problems that must be tackled when empirically implementing theoretical models and econometric methods used in the literature finally we present results from a reduced form estimation of a sequential move entry game using data from the uk hamburger market

virtuous interactions in removing exclusion the link between foreign market access and access to education abstract we outline a methodology which aims to give an answer to the widespread demand of impact analyses by regulators or by funding agencies which need to evaluate the current and past performance of development projects and may lack time series evidence we devise a retrospective panel data approach to evaluate the dynamics of the effects of fair trade affiliation on the schooling decisions of a sample of thai organic rice producers across the past 20 years we find that the probability of school enrolment in families with more than two children is significantly affected by fair trade affiliation years we try to ascertain whether our finding is robust to endogeneity of producers choices of local cooperative affiliation and adoption of organic techniques the significant difference between pre and post fair trade affiliation performance documents that fair trade participation generates a significant break in the schooling decisions of affiliated households

households saving in china china in recent years the world s largest and fastest growing economy also has national saving rates that are among the highest in the world this article considers a variety of statistical issues that cloud the measurement of aggregate and household saving in china it also provides new empirical evidence on the importance of intertemporal considerations in explaining the variation in household saving across china s provinces given china s size and its high saving rates it is not surprising that in recent year s considerable theoretical and empirical effort has been devoted to understanding its saving behavior this research can be divided into two broad strands the first emphasizes the relevance for china of traditional equilibrium theories of saving ranging from simple keynesian consumption saving functions to variants of the life cycle and permanent income hypotheses the second argues that equilibrium theories of saving are unlikely to be relevant in an economy in transition from plan to market instead disequilibrium factors especially shortages and rationing in goods and credit markets explain china s saving experience more broadly china s saving rate remains unusually high relative to international experience even after controlling for some of the determinants of saving

the working behavior of young people in rural cote d ivoire one of the major features of structural adjustment is an attempt to reallocate laborand hence output through changes in relative prices this article assesses how price changes affect the working patterns of young people in rural c6te d7voire the analysis is based on a model of the labor supply of rural households and on the construction of composite price indexes the data come from the c6te d ivoire living standards survey for 1985 and 1986 the panel aspect of the data allows the work choice made in one year to depend on the individual s choice in the previous year results indicate that the price of agricultural output generally is a positive incentive on the decision to participate in the labor force however this result depends heavily on the employment and education of the individual in the previous period those not already working are less likely to respond to favorable movements in the prices of cash crops by entering the work force this article reports on research on the determinants of working patterns among young people in rural c6te d ivoire because young people s decisions about working are closely related to decisions about schooling the article also focuses on the relationship between work and school the motivation for this study arises from an interest in the effects of structural adjustment programs on work incentives structural adjustment is expected to increase output by altering the incentives facing producers the effect of improved incentives could in principle be measured by directly observing changes in output the time lag between the change in incentives and the change in output can be substantial however especially when tree crops are involved so that data over a long period may be

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

the effect of increased longevity on capital accumulation one of the more startling demographic trends of the 1970 s has been the sharp rise in lifespan in the united states between 1970 and 1980 the life expectancy of 25year old men and women increased by at least two years while longevity has been steadily rising for many decades the recent spurt has hastened the trend the increase for both men and women in the 1970 s more than doubled the improvement of the 1960 s 1 the 1970 s were also characterized by a decline in labor force participation of older workers although rising income and increased disability payments may have explained some of the decline donald parsons 1980 it seems clear that expanding longevity has not been strongly associated with deferred retirement daniel hamermesh 1984 2 thus the retirement years have assumed greater importance in financial planning for the consumer as he or she retires earlier and lives longer the traditional life cycle model would predict greater savings rates as consumers increase accumulation of assets for their retirement consumption while young would drop and there might be an increase in labor supply as individuals substitute leisure while young for greater levels of life cycle consumption even under a social security system as long as the current generation s tax liabilities reflect their longer lifespan total savings private plus public should also rise 3 the predicted increase in savings is substantial a simple example using the modigliani ando brumberg life cycle model can illustrate the extent of the savings shift assume that earnings and consumption are constant over working years and lifespan respectively and that the interest rate is zero consumption is then a constant proportion k of earnings where k is the ratio of working years to one s lifespan if consumers made plans based on average lifespan the representative 25 year old would have saved 18 percent of earnings in 1970 1 40 49 when he plans to retire at age 65 and expects to live until age 74 in 1980 after a rise in life expectancy of two years the representative 25 year old would have increased savings to 21 percent of earnings or a net rise in the savings rate per worker of 17 percent that is this simple life cycle model implies that savings in the last decade should have risen other things held constant by approximately 17 percent or about 80 billion dollars per year the evidence from aggregate time series data appears to contradict the life cycle model s prediction of rising savings rates the net private savings rate in the united states declined from 7 8 percent of nnp in 1970 to 6 2 percent in 1980 while alan auerbach 1982 has suggested that some of the reported decline in savings may be caused by mismeasurement it seems clear that there has been no substantial rise in the savings rate there are numerous explanations for department of economics university of virginia charlottesville va 22901 i am grateful to maxim engers daniel hamermesh william r johnson laurence j kotlikoff john strauss and especially james davies and john r wolfe for helpful suggestions and comments life table data can be found in daniel hamermesh 1985 the life insurance fact book various years or in unpublished form from the national center for health statistics 2john wolfe 1983 provides an ingenious argument for why the social security benefit schedule has induced those with shorter life expectancies to retire early we might therefore expect some rise in the average retirement age as those expecting to live longer defer retirement until age 65 3if the social security taxes do not rise as expected lifespan increases perhaps because current tax proceeds are paid out as current benefits rather than retained in a trust fund young workers will save more to offset the lower expected benefits in the future 4in a two period model the percentage change in savings by the young is equal to the percentage change in aggregate savings

productivity health and inequality in the intrahousehold distribution of food in low income countries a model is formulated incorporating linkages among nutrition labor market productivity health heterogeneity and the intrahousehold distribution of food and work activities in a subsistence economy empirical results based on a sample of households from bangladesh indicate that despite considerable intrahousehold disparities in calorie consumption households are averse to inequality furthermore consistent with the model the results also indicate that both the higher level and greater variance in the calories consumed by men relative to women reflect in part the greater participation by men in activities in which productivity is sensitive to health status copyright 1990 by american economic association

the nature of the savings function in developing countries a survey of the theoretical and empirical literature the savings rate marginal or average is regarded as a key performance indicator by development economists and foreign aid practitioners admonish their clients to increase their savings ratio as a primary condition for achieving a satisfactory rate of economic growth however not only have questions been raised regarding the significance of the savings effort as an independent determinant of economic progress but the formulation of policies designed to increase the savings propensity has suffered from a dearth of knowledge regarding the nature of the savings function in developing countries a number of alternative savings hypotheses derived mainly from the literature relating to developed economies have been advanced but the paucity of reliable data has made it difficult to test these hypotheses and obtain results which warrant a reasonable degree of confidence the purpose of this article is a to review the theoretical and empirical literature on the savings function in developing countries b to assess critically the findings with respect to the major hypotheses and c to summarize the state of our knowledge on this important topic we shall begin with a brief review of the nature of the data on savings in developing countries with which economic analysts must work

the family as an incomplete annuities market families can self insure against uncertain dates of death through implicit or explicit agreements with respect to consumption and interfamily transfers interfamily transfers need have nothing to do with altruistic feelings they may simply reflect risk sharing behavior of completely selfish family members although family annuity markets are incomplete even small families can substitute by more than 70 percent for perfect market annuities given adverse selection and transaction costs family risk pooling may be preferred to public market annuities in the absence of public annuities these risk sharing arrangements provide powerful incentives for marriage and family formation

entry in monopoly market this paper develops new empirical models of market concentration from game theoretic models of entry we construct our models from inequality conditions that describe entrants equilibrium strategies in simultaneous move and sequential move games and use them to study the effects of entry in isolated monopoly markets for new automobiles from estimates of the market size necessary to support one and two dealers we conclude that monopoly dealers do not block the entry of a second dealer we also find that entry does not cause price cost margins to fall by much

preferred personal equilibrium and simple choices abstract this paper studies choices under the preferred personal equilibrium concept introduced by koszegi and rabin 2006 for modeling choice given expectations based reference dependent preferences the main result of this paper shows that when expectations are not observed and parametric assumptions on utility are not made preferred personal equilibrium choice is a special case of the rational shortlist method of manzini and mariotti 2007 building on this connection the paper provides an axiomatization of preferred personal equilibrium choice behavior and discusses the implications of these results for how choices can be used to test and identify the model and for the relationship between preferred personal equilibrium and other models of behavior

optimal intertemporal consumption decisions under the threat of starvation abstract this paper studies consumption and saving decisions over time in a life cycle model in which survival from one period to the next is endogenous survival probabilities depend on health which is a capital stock subject to depreciation and which can be augmented by consumption nutrition borrowing is ruled out in our model and we investigate optimal consumption decisions when income fluctuates at seasonal frequencies and when income follows a stochastic process among other results we show that understanding the pattern of income is necessary for understanding consumption decisions when survival is probabilistic and endogenous

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

permanent household income and consumption in urban south america milton friedman s permanent income hypothesis pih is considerably more complex and difficult to test than it appears at first sight which is why certain of its postulates still cannot be accepted or rejected with certainty one of the chief difficulties is that of separating the effects on consumption of permanent income which is unobservable and of various observable household characteristics which may be highly correlated with permanent income but may also be presumed to affect consumption directly this difficulty can be overcome provided a variable can be found which is associated with permanent income but has no independent direct effect on the propensity to consume if households are grouped by classes of that variable the permanent consumption propensity or elasticity can be estimated from mean income and consumption in the groups this technique requires the assumption of zero mean transitory income in each group but does not depend on the postulate that transitory income is uncorrelated with consumption for these reasons it cannot be applied to individual households this paper presents and estimates a model which separates the direct and indirect effects on consumption of a series of observable characteristics using regression techniques on individual household observations this makes it possible to estimate all the parameters of the model both the consumption propensity or elasticity and the contribution to permanent income of each observable explanatory variable the technique still requires that at least one of the explanatory variables affect consumption only through permanent income but for all other variables both direct and indirect influences can be estimated and the propensity to consume a given income can vary among households with different characteristics another principal problem with the pih is the assumption that transitory income and consumption are uncorrelated efforts to test this postulate can lead to very different results ranging from agreement with the hypothesis to findings of high propensities to consume transitory income see robert ferber pp 1306 09 this inconsistency and continued controversy over the hypothesis is due to the fact that permanent income cannot be estimated exactly but can be known only with an error which is conceptually distinct from transitory income empirical work on the pih has uniformly overlooked this fact treating estimates of permanent income as exact and regarding the whole of the unexplained residual as transitory income the present model explicitly distinguishes the estimation error from the error of transitory income or consumption the two transitory components can then be assumed to be uncorrelated while the part of permanent income which is not explained is consumed exactly like the explained part whether residual income and consumption appear to be correlated or not then depends on the relative sizes of these two components the unexplained permanent part and the true transitory part this technique has the further advantage that estimating the variance of the error of estimation makes it possible to tell how well a set of observable variables explain permanentincome this explanation may be better than the brookings institution robert solow richard eckaus and robert hall supervised the dissertation 1974 on which this article is based i am particularly grateful to ross williams and robert hall for help in specifying and estimating the model and to denisard alves for a crucial suggestion william cline irwin friend ricardo ffrench davis and robert ferber provided helpful comments on earlier versions subsequent discussions with surjit bhalla and robert lawrence have been most useful i am also much indebted to the managing editor and to a referee for improvements in the final version

revealed p reference theory abstract this paper develops axiomatically a revealed preference theory of reference dependent choice behavior instead of taking the reference for an agent as exogenously given in the description of a choice problem we suitably relax the weak axiom of revealed preference to obtain endogenously the existence of reference alternatives as well as the structure of choice behavior conditional on those alternatives we show how this model captures some well known choice patterns such as the attraction effect jel d11 d81

reference dependent subjective expected utility abstract a reference dependent generalisation of subjective expected utility theory is presented in this theory preferences between acts depend both on final outcomes and on reference points which may be uncertain acts it is characterised by a set of axioms in a savage style framework a restricted form of the theory separates attitudes to end states encoded in a satisfaction function from attitudes to gains and losses of satisfaction given weak additional assumptions the restricted theory excludes cycles of choice explains observed disparities between willingness to pay and willingness to accept valuations of lotteries and predicts preference reversal

measuring market power in the ready to eat cereal industry the ready to eat cereal industry is characterized by high concentration high price cost margins large advertising to sales ratios and numerous introductions of new products previous researchers have concluded that the ready to eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense nonprice competition this paper empirically examines this conclusion in particular i estimate price cost margins but more importantly i am able empirically to separate these margins into three sources i that which is due to product differentiation ii that which is due to multi product firm pricing and iii that due to potential price collusion the results suggest that given the demand for different brands of cereal the first two effects explain most of the observed price cost margins i conclude that prices in the industry are consistent with noncollusive pricing behavior despite the high price cost margins leading firms are able to maintain a portfolio of differentiated products and influence the perceived product quality it is these two factors that lead to high price cost margins

early childhood nutrition and academic achievement a longitudinal analysis abstract many policymakers propose early childhood nutrition programs as a way to increase students academic achievement this paper investigates the nutrition learning nexus using a unique longitudinal data set that follows a large sample of filipino children from birth until the end of their primary education we find that better nourished children perform significantly better in school partly because they enter school earlier and thus have more time to learn but mostly because of greater learning productivity per year of schooling our cost benefit analysis suggests that a dollar invested in an early childhood nutrition program in a developing country could potentially return at least three dollars worth of gains in academic achievement and perhaps much more

sequentially rationalizable choice a sequentially rationalizable choice function is a choice function that can be retrieved by applying sequentially to each choice problem the same xed set of asymmetric binary relations rationales to remove inferior alternatives these con cepts translate into economic language some human choice heuristics studied in psychology and explain cyclical patterns of choice observed in experiments we study some properties of sequential rationalizability and provide a full character ization of choice functions rationalizable by two and three rationales

structural estimation of sequential games of complete information in models of strategic interaction there may be important order of entry effects if one player can credibly commit to an action e g entry before other players if one esti mates a simultaneous move model then the move order effects will be confounded with the payoffs this paper considers nonparametric identification and simulation based estimation of sequential games of complete information relative to simultaneous move games these models avoid the problem of multiple equilibria and require fewer payoff normalizations we apply the estimator in several monte carlo experiments and to study entry order effects using data from the airline industry

estimation of dynamic discrete choice models in continuous time with an application to retail competition this paper provides a method for estimating and solving dynamic discrete choice models in a continuous time framework that is computationally light the method is particularly useful in dynamic games in the proposed framework players face a standard dynamic discrete choice problem at decision times that occur stochastically the resulting stochastic sequential structure naturally admits the use of ccp methods for estimation and makes it possible to compute counterfactual simulations for relatively high dimensional games we apply our techniques to examine the impact of walmart s entry into the retail grocery industry showing that even the threat of entry by walmart has a substantial eect on market structure

wealth varying intertemporal elasticities of substitution evidence from panel and aggregate data abstract this paper constructs and estimates a model of consumer preferences in which the intertemporal elasticity of substitution ies of consumption expenditure rises with the level of wealth the purpose of this paper is to measure the effect that systematic variation in the ies of poor and rich consumers has on the ies of aggregate consumption expenditure we find economically significant differences in the ies of poor and rich consumers in indian panel data on the consumption of individual households we also find economically significant differences in the ies measured in aggregate time series data for the u s and india

pricing and market concentration in oligopoly markets this paper investigates the relationship between prices and market concentration in the auto rental industry we assemble an original database that includes the number of auto rental operators and other exogenous demand and cost conditions at every commercial airport in the country the data are interesting because we observe a large variation in market structure ranging from more than 100 monopoly and duopoly markets to several competitive airports with more than eight firms in addition we collect daily rental prices in each market that are regressed against the number of operating firms and other control factors due to potential biases in treating market participants as exogenously assigned we employ a two stage estimation procedure in which an equilibrium model of endogenous market structure provides correction terms for the second stage price regression results show that ignoring the endogeneity of market structure severely underestimates the impact of additional competitors on prices with the

productive consumption and population dynamics in an endogenous growth model demographic trends and human development aid in developing economies abstract we find that by endogenizing the population growth rate a growth model under the productive consumption hypothesis is more tractable than models in previous studies and has interesting implications for population dynamics in the zero saving phase multiple saddle point stable steady states may exist and the population growth rate may rise or decline along a transition path in the positive saving phase such a steady state may exist uniquely and the population growth rate may decline with phase switching the population growth rate may follow an inverted u shaped curve human development aid may help an economy escape from an underdevelopment trap

estimation of a model of entry in the airline industry this paper considers the effect of an airline s scale of operation at an airport on the profitability of routes flown out of that airport the empirical methodology uses the entry decisions of airlines as indicators of underlying profitability the results extend the empirical literature on airport presence by providing a new set of estimates of the determinants of city pair profitability these estimates imply that city pair profits increase in airport presence and decrease rapidly in the number of entering firms the literature on empirical models of oligopoly entry is also extended via a focus on the role of differences between firms

measuring the business stealing cannibalization and market expansion effects of entry in the u s motion picture exhibition market using a large and comprehensive theater level database covering over 18 billion in theater revenues over a five year period i document the extent and nature of business stealing revenue cannibalization and market expansion that occurred during the height of the 1990 s boom in movie theater construction

reference dependent consumption plans we develop a rational dynamic model in which people are loss averse over changes in beliefs about present and future consumption because changes in wealth are news about future consumption preferences over money are reference dependent if news resonates more when about imminent consump tion than when about future consumption a decision maker might to generate pleasant surprises overconsume early relative to the optimal committed plan increase immediate consumption following surprise wealth increases and delay decreasing consumption following surprise losses since higher wealth mitigates the effect of bad news people exhibit an unambiguous first order precautionary savings motive

savings and nutrition at low incomes while many development theorists assume saving propensities vary among different groups there has been limited theoretical justification for this view this paper analyzes two complementary theories stressing the effect on saving of physiological consequences of poor nutrition at low incomes one influence is on the probability of survival another is on workers productivity either effect means that the average propensity to save can rise with income issues considered include annuities exogenous changes in survival and efficiency implications for the efficiency wage theory of unemployment and distinctions between wage and nonwage income implications of nutritional effects for econometric specification of saving functions are stressed

new york city cab drivers labor supply revisited reference dependent preferences with rational expectations targets for hours and income this paper reconsiders whether cabdrivers labor supply decisions reflect reference dependent preferences following botond koszegi and matthew rabin 2006 we construct a model with targets for hours as well as income both determined by rational expectations estimating using henry s farber s 2005 2008 data we show that the reference dependent model can reconcile his 2005 finding that drivers stopping probabilities are significantly related to hours but not income with the negative wage elasticity of hours found by colin camerer et al 1997 and farber 2005 2008 the model yields sensible estimates that avoid farber s 2008 criticism that drivers income targets are too unstable to allow a useful reference dependent model of labor supply

socially optimal subsidies for entry the case of medicare payments to hmos the u s medicare program has increased its spending on private medicare plans in anticipation of larger consumer surplus and higher efficiency to evaluate the welfare consequences of such policy interventions i develop an empirical model with endogenous entry counterfactual simulation reveals the following subsidizing hmo entry can be justified to enhance national welfare no excessive entry the level of price subsidies in 2008 however is far beyond the optimal level and the geographic inconsistency between the subsidies and the medicare fee for service costs is another source of inefficiency resolving this geographic inconsistency significantly raises national welfare by restructuring entry

an empirical model of firm entry with endogenous product type choices i describe a model of entry with endogenous product type choices these choices are formalized as the outcomes of a game of incomplete information in which rivals differentiated products have nonuniform competitive effects on profits i estimate the model for location choices in the video retail industry using a nested fixed point algorithm solution the results imply significant returns to product differentiation simulations illustrate the tradeoff between demand and intensified competition and the extent to which markets with more scope for differentiation support greater entry

contestable markets an uprising in the theory of industry structure presents a transcript of the presidential address delivered at the 94th meeting of the american economic association on december 29 1981 discussion of developments in the theory of industry structure welfare attributes of contestable markets behavior characteristics of oligopoly equilibrium intertemporal vulnerability to inefficient entry ebsco

international evidence on how income inequality and credit market imperfections affect private saving rates abstract this paper empirically examines the hypothesis that income distribution exerts an independent effect on private saving rates across countries and tests particular channels for income inequality to affect private saving rates cross sectional and panel regression results show that inequality has a robust positive effect on private saving rates that depends on financial market development and credit available to the private sector the paper thus identifies credit market imperfections as the likely reason for the inequality private saving link the data provide no evidence supporting a subsistence channel for inequality to affect private saving as suggested by nonhomothetic utility functions

rational choice with status quo bias abstract motivated by the empirical findings concerning the importance of one s current situation on her choice behavior the main objective of this paper is to propose a rational choice theory that allows for the presence of a status quo bias and that incorporates the standard choice theory as a special case we follow a revealed preference approach and obtain two nested models of rational choice that allow phenomena like the status quo bias and the endowment effect and that are applicable in any choice situation to which the standard static choice model applies

human capital investment and the gender division of labor in a brawn based economy we use a model of human capital investment and activity choice to explain facts describing gender differentials in the levels and returns to human capital investments these include the higher return to and level of schooling the small effect of healthiness on wages and the large effect of healthiness on schooling for females relative to males the model incorporates gender differences in the level and responsiveness of brawn to nutrition in a roy economy setting in which activities reward skill and brawn differentially empirical evidence from rural bangladesh provides support for the model and the importance of the distribution of brawn

uncertain demand consumer loss aversion and flat rate tariffs we consider a model of firm pricing and consumer choice where consumers are loss averse and uncertain about their future demand possibly consumers in our model prefer a flat rate to a measured tariff even though this choice does not minimize their expected billing amount a behavior in line with ample empirical evidence we solve for the profit maximizing two part tariff which is a flat rate if a marginal costs are not too high b loss aversion is intense and c there are strong variations in demand moreover we analyze the optimal nonlinear tariff this tariff has a large flat part when a flat rate is optimal among the class of two part tariffs

why do all the flights leave at 8 am competition and departure time differentiation in airline markets abstract theoretical models of spatial product differentiation indicate that firms face two opposing incentives 1 minimize differentiation in order to steal customers from competitors and 2 maximize differentiation in order to reduce price competition using data on u s airline departure times from 1975 when fares were regulated and 1986 when fares were not regulated we empirically estimate the effect of competition on differentiation we find a negative relationship in both periods in 1986 however reductions in exogenous scheduling constraints increase differentiation implying that firms may be differentiating their products where possible to reduce price competition this effect is not apparent in the 1975 data

entry industry growth and the microdynamics of industry supply entry is widely discussed but rarely subjected to empirical study this study develops a competitive theory of entry with primary focus on the relationship between entry and industry growth the main ingredients are adjustment costs to firms already in the industry and the distribution of fixed entry cost to potential entrants the theory suggests sufficient conditions under which the entry rate is an increasing convex function of the industry growth rate a regression model correcting for severe heteroscedasticity is applied to data from swedish manufacturing industries the results are consistent with the theoretical prediction for growth and other key variables expected to influence entry significantly

a simple test of the nutrition based efficiency wage model abstract in the nutrition based efficiency wage model wages in labor markets in developing countries are rigid because lowering them would reduce worker productivity and increase the cost per efficiency unit i evaluate this claim using data from rural india i find that contrary to what has been assumed in these models a wage cut should lower the cost per efficiency unit of labor

choice based on reasons the case of attraction and compromise effects building on previous research this article proposes that choice behavior under preference uncertainty may be easier to explain by assuming that consumers select the alternative supported by the best reasons this approach provides an explanation for the so called attraction effect and leads to the prediction of a compromise effect consistent with the hypotheses the results indicate that 1 brands tend to gain share when they become compromise alternatives in a choice set 2 attraction and compromise effects tend to be stronger among subjects who expect to justify their decisions to others and 3 selections of dominating and compromise brands are associated with more elaborate and difficult decisions

does better nutrition raise farm productivity household level data from sierra leone are used to test whether higher caloric intake enhances family farm labor productivity this is the notion behind the efficiency wages hypothesis which has found only weak empirical support a farm production function is estimated accounting for the simultaneity in input and calorie choice instruments include prices household demographic characteristics and farm assets the latter two sets of instruments are later dropped to explore the robustness of the results to different specifications of exogeneity the exercise shows a highly significant effect of caloric intake on labor productivity providing solid support for the nutrition productivity hypothesis the marginal effect on productivity falls drastically as calorie consumption rises but remains positive at moderately high levels of intake one result is a fall in the effective price of food a decline that is larger for households that consumer fewer calories

the lucky few amidst economic decline distributional change in cote d ivoire as seen through panel data sets 1985 88 this article is an exploratory exercise in using panel data sets to investigate distributional change in cote d ivoire during the second half of the 1980s the panels made it possible to highlight and quantify mobility of the same households across poverty classes over time we found that there were a lucky few who improved their standard of living amid general decline detailed investigations revealed that the lucky few were fairly numerous and the probability of escaping poverty was quite high even for the very poorest these lucky few were widespread regionally although in some socio economic groupings the poor had higher chances of escaping poverty

on the theory of reference dependent preferences a theory is proposed in which preferences are conditional on reference points it is related to tversky and kahneman s reference dependent preference theory but is simpler and deviates less from conventional consumer theory preferences conditional on any given reference point satisfy conventional assumptions apart from a continuity condition the only additional restriction is to rule out cycles of pairwise choice the theory is consistent with observations of status quo bias and related effects reference points are treated as subject to change during the course of trade the implications of endogeneity of reference points for behaviour in markets are investigated

estimating strategic models of international treaty formation this article develops an empirical framework for analysing the timing of international treaties a treaty is modelled as a dynamic game among governments that decide on participation in every period the net benefit of treaty membership increases over time spillovers among members and non members accelerate or delay treaty formation by transforming participation into a strategic complement or substitute respectively the predictions of the model inform the estimation of the structural parameters based on a cross section of treaty ratification dates with this approach i estimate the sign and magnitude of strategic interaction in the ratification of the montreal protocol in the formation of europe s preferential trade agreements and in the growth of germany s network of bilateral investment treaties through a series of counterfactual experiments i explore different mechanisms that give rise to strategic interaction in the formation of these treaties

the impact of group based credit programs on poor households in bangladesh does the gender of participants matter this paper estimates the impact of participation by gender in the grameen bank and two other group based micro credit programs in bangladesh on labor supply schooling household expenditure and assets the empirical method uses a quasi experimental survey design to correct for the bias from unobserved individual and village level heterogeneity we find that program credit has a larger effect on the behavior of poor households in bangladesh when women are the program participants for example annual household consumption expenditure increases 18 taka for every 100 additional taka borrowed by women from these credit programs compared with 11 taka for men

choosing between order of entry assumptions in empirical entry models evidence from competition between burger king and mcdonald s restaurant outlets we demonstrate how a non nested statistical test developed by vuong 1989 can be used to assess the suitability of alternate order of entry assumptions used for identification purposes in empirical entry models as an example we estimate an entry model of mcdonald s and burger king restaurant outlets in united states the data set focuses on relatively small isolated markets for these markets the non nested tests suggest that order of entry assumptions that give burger king outlets a first mover advantage are statistically preferred last a monte carlo experiment provides encouraging results suggesting that the vuong type test yields reliable results within the entry model framework

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

terms of trade and national saving rates in asia abstract in recent theoretical work obstfeld and svensson and razin re examine the harberger laursen metzler effect of terms of trade changes on the balance of payments current account their models of intertemporal utility maximization indicate that individuals saving responses to a change in the terms of trade are ambiguous in theory from this they infer that the corresponding movements in the current account are also ambiguous however they ignore the positive rate of growth effect incorporated in the life cycle theory on the aggregate saving rate this paper presents an empirical analysis of the terms of trade effect on aggregate national saving rates in 14 asian developing countries over the period 1961 1981 it turns out to be significantly positive as the life cycle model predicts

a test of the relative income hypothesis the original permanent income and life cycle models were constructed around the view that savings rates are independent of the level of long run income 19 since then it has been well documented using household data that savings rates rise with long run income to be consistent with the empirical evidence modigliani suggests modifying the life cycle hypothesis to include a bequest motive his hypothesis however is that the share of lifetime resources that a household plans to devote to bequests is an increasing function of its lifetime resources relative to others in the same age cohort 17 the share of resources devoted to bequests is made a function of the relative and not the absolute level of resources so as to be consistent with menchik and david s empirical study of the bequest function 16 but if saving for bequests is influenced by relative income why not other forms of saving a simple model in which all types of saving are influenced by relative income was proposed by duesenberry in 1949 4 his basic hypothesis was that households are concerned about community consumption standards and that this concern leads to savings rates being an increasing function of a household s position in the income distribution although a per se desire for status is seen by some economists as inconsistent with rational behavior it is clear that a relative advantage is often instrumental in achieving absolute goals 6 7 10 11 22 while several policy implications of the relative income hypothesis have come to light 2 6 it has rarely been analyzed empirically the purpose of this paper is to present a test of the relative income model the hypothesis is that if income rank is really the variable driving savings rates then it should be possible to hold the level of income constant and still see the average propensity to save aps moving with income rank section ii presents a simple model of the savings decision in which concern for relative standing in the current consumption hierarchy is integrated into a permanent income framework the model is then used to explore the issue of functional form section iii discusses the data the equation to be estimated and the regression results section iv presents a summary and concluding remarks

market structure and multiple equilibria in airline markets we provide a practical method to estimate the payoff functions of players in complete information static discrete games with respect to the empirical literature on entry games originated by bresnahan and reiss 1990 and berry 1992 the main novelty of our framework is to allow for general forms of heterogeneity across players without making equilibrium selection assumptions we allow the effects that the entry of each individual airline has on the profits of its competitors its competitive effects to differ across airlines the identified features of the model are sets of parameters partial identification such that the choice probabilities predicted by the econometric model are consistent with the empirical choice probabilities estimated from the data we apply this methodology to investigate the empirical importance of firm heterogeneity as a determinant of market structure in the u s airline industry we find evidence of heterogeneity across airlines in their profit functions the competitive effects of large airlines american delta united are different from those of low cost carriers and southwest also the competitive effect of an airline is increasing in its airport presence which is an important measure of observable heterogeneity in the airline industry then we develop a policy experiment to estimate the effect of repealing the wright amendment on competition in markets out of the dallas airports we find that repealing thewright amendment would increase the number of markets served out of dallas love

differentiation and competition in hmo markets this paper examines how differentiation among health maintenance organizations hmos affects local market competition most markets for hmos appear sufficiently unconcentrated however differences among hmos may make competition less intense than the number of competitors would suggest to investigate this possibility we distinguish hmos that serve only local markets from those that operate regional or national networks we analyze how hmos of one type affect the profitability of the other using an equilibrium model of entry and product choice while the two types of hmos have strong competitive effects within segments the competitive effect of differentiated firms is negligible

estimation of an equilibrium model with externalities post disaster neighborhood rebuilding we study the optimal design of subsidies in an equilibrium setting where the decisions of individual recipients impose externalities on one another we apply the model to the case of post katrina rebuilding in new orleans under the louisiana road home rebuilding grant program rh we estimate the structural model via indirect inference exploiting a discontinuity in the formula for determining the size of grants which helps isolate the causal effect of neighbors rebuilding on one s own rebuilding choices we find that the additional rebuilding induced by rh generated positive externalities equivalent to 4950 to each inframarginal household whose rebuilding choice was not affected by the program counterfactual policy experiments find that optimal subsidy policies bias grant offers against relocation with an inverse u shaped relationship between the degree of bias and the severity of damages from the disaster

seasonality in the u s motion picture industry the observed seasonality of box office revenues reflects both seasonality in underlying demand for movies and seasonality in the number and quality of available movies i separately identify these aspects by estimating weekly demand for movies using movie fixed effects a long panel of movies weekly revenues and restrictions on their decay pattern i find that the estimated seasonality in underlying demand is much smaller and slightly different from the observed seasonality of sales the biggest movies are released at times when demand is highest amplifying the underlying seasonality price rigidities in the industry may facilitate this amplification effect

policy design and conservation compliance on highly erodible lands we develop a game theoretic model of heterogeneous producers in order to identify the economic determinants of producer noncompliance with the conservation provisions of the united states department of agriculture usda policy on highly erodible lands we evaluate the policy effectiveness in inducing compliance and adoption of conservation practices the current policy design creates economic incentives for all noncompliant producers to masquerade as adopters and to claim government payments for which they are not entitled both theoretical and empirical results indicate that the increased income transfers to agriculture enacted under the latest farm bill will increase producer compliance and conservation activity on highly erodible lands

preemption and rent equalization in the adoption of new technology we study the adoption of a new technology to illustrate the effects of preemption in games of timing we show that the threat of preemption equalizes rents in a duopoly but that this result does not extend to the general oligopoly game if the gain to preemption is sufficiently small then the optimal symmetric outcome which involves late adoption is an equilibrium this contrasts with reinganum s result that in precommitment equilibria there must be diffusion we develop a new and richer formalism for modeling games of timing which permits a continuoustime representation of the limit of discrete time mixed strategy equilibria

a theory of endogenous commitment commitment is typically modelled by assigning to one of the players the ability to take an initial binding action the weakness of this approach is that the fundamental question of who has the opportunity to commit cannot be addressed as it is assumed this paper presents a framework in which commitment power arises endogenously from the fundamentals of the model we construct a finite dynamic game in which players are given the option to change their minds as often as they wish but pay a switching cost if they do so we show that for games with two players and two actions there is a unique subgame perfect equilibrium with a simple structure this equilibrium is independent of the order and timing of moves and is robust to other protocol specifications moreover despite the perfect information nature of the model and the costly switches strategic delays may arise in equilibrium the flexibility of the model allows us to apply it to various environments in particular we study an entry deterrence situation its equilibrium is intuitive and illustrative of how commitment power is endogenously determined copyright 2008 wiley blackwell

data watch the world bank s living standards measurement study household surveys since 1985 the world bank has been collecting household survey data in developing countries that provide a rich source of information for assessing household welfare understanding household behavior and evaluating the impact of government policies this article describes these household surveys known as living standards measurement study lsms surveys and explains how to obtain their data lsms surveys have been implemented in over twenty developing countries and have been used to analyze poverty labor markets health and education pricing policies determinants of school performance savings and consumption smoothing health and nutrition policies and gender and fertility issues

the dynamic provision of product diversity under duopoly abstract this paper builds a dynamic duopoly model to examine the provision of new varieties over time consumers experience temporary satiation and hence higher consumption of the current variety lowers demand for future varieties the equilibrium can be characterized by a combination of monopolistic pricing and nearly zero profits competitive timing in particular if the cost of producing a new variety is not too low then firms tend to avoid head to head competition and set the short run profit maximizing price however firms tend to introduce new varieties as soon as demand has grown sufficiently to cover costs from a second best perspective the equilibrium may exhibit excessive product diversity however if firms coordinate their frequency of new product introductions then consumers are likely to be harmed it is also shown that equilibrium prices are moderated by two factors first consumers option value of waiting reduces their willingness to pay second competition reduces firms incentives to engage in intertemporal price discrimination

dynamic product diversity the goal of this paper is to study the frequency of new product introductions in monopoly markets where demand is subject to transitory saturation we focus on those types of goods for which consumers purchase at most one unit of each variety but repeat purchases in the same product category the model considers in nitely lived forward looking consumers and rms we show that the share of potential surplus that a monopolist is able to appropriate increases with the frequency of introduction of new products and the intensity of transitory saturation if the latter is su ciently strong then the rate of introduction of new products is higher than socially desirable excessive dynamic product diversity jel classi cation numbers l12 l13

reference dependent risk attitudes we use koszegi and rabin s 2006 model of reference dependent utility and an extension of it that applies to decisions with delayed consequences to study preferences over monetary risk because our theory equates the reference point with recent probabilistic beliefs about outcomes it predicts specific ways in which the environment influences attitudes toward modest scale risk it replicates classical prospect theory including the prediction of distaste for insuring losses when exposure to risk is a surprise but implies first order risk aversion when a risk and the possibility of insuring it are anticipated a prior expectation to take on risk decreases aversion to both the anticipated and additional risk for large scale risk the model allows for standard consumption utility to dominate reference dependent gain loss utility generating nearly identical risk aversion across situations

a canonical model of choice with initial endowments we use the revealed preference method to derive a model of individual decision making when the endowment of an agent provides a reference point that may influence her choices this model generalizes the classical rational choice model which views choice as a consequence of utility maximization instead our model sees choice as arising from psychologically constrained utility maximization where the constraints are induced by one s initial endowment in particular this model produces status quo bias as a natural consequence but not necessarily the endowment effect a range of economic applications identify the predictive and explanatory strength of the model in particular we demonstrate that the status quo bias phenomenon reduces the size of the substitution effect in problems of consumption choice

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