the rotten kid theorem meets the samaritan s dilemma a familiar result in the economic theory of the family is becker s rotten kid theorem this theorem states that altruism by a family member will lead other selfish members to act efficiently from the family viewpoint we extend becker s one period model to two periods and show that parental altruism can result in an inefficiency known in other contexts as the samaritan s dilemma implications of this for transfer arrangements within the family and for the ricardian equivalence theorem are drawn

a review of wta wtp studies abstract willingness to accept wta is usually substantially higher than willingness to pay wtp these constructs have been studied for roughly 30 years and with a wide variety of goods this paper reviews those studies we find that the less the good is like an ordinary market good the higher is the ratio the ratio is highest for non market goods next highest for ordinary private goods and lowest for experiments involving forms of money a generalization of this pattern holds even when we account for differences in survey design ordinary goods have lower ratios than non ordinary ones we also find that ratios in real experiments are not significantly different from hypothetical experiments and that incentive compatible elicitation yields higher ratios

the boundaries of loss aversion abstract in this article the authors propose some psychological principles to describe the boundaries of loss aversion a key idea is that exchange goods that are given up as intended do not exhibit loss aversion for example the authors propose that money given up in purchases is not generally subject to loss aversion the results of several experiments provide preliminary support for the hypotheses the authors find that consistent with prospect theory loss aversion provides a complete account of risk aversion for risks with equal probability to win or lose the authors propose boundaries for this result and suggest further tests of the model

salience in experimental tests of the endowment effect starting with knetsch 1989 experiments on the endowment effect thaler 1980 typically rely on a two stage procedure in the first stage subjects are endowed with a good such as a mug in the second stage the same subjects are given the opportunity to trade this good for another good of similar value such as a pen the endowment effect holds that very few subjects chose to trade sometimes as few as ten percent in related experiments subjects state selling prices for their endowment that are much higher than their buying prices for the same good these patterns are hard to reconcile with standard choice theory which predicts that about half the subjects would trade and that selling prices and buying prices are similar the common explanation of this evidence relies on prospect theory s loss aversion tversky and kahneman 1979 because the pain of parting with the endowment looms larger in the decision maker s mind than the pleasure of acquiring a good of similar value kahneman knetsch and thaler 1990 a decision maker endowed with a mug is unwilling to trade it for a

the economics of enforcing pollution taxation abstract the efficient structure of pollution tax policy is examined when it is recognized that enforcing compliance will be costly there are two components of this cost 1 the direct cost of enforcement and 2 the cost polluters incur avoiding enforcement considering only the first cost the efficient pollution policy calls for a tax in excess of that conventionally recommended as efficient t but with little enforcement once avoidance cost is recognized the efficient policy can be substantially altered requiring a tax lower than t but with greater enforcement even when direct enforcement cost is zero it is shown that there is no unique advantage to t in the absence of avoidance cost

uniform versus peak load pricing of a bottleneck with elastic demand abstract this paper considers commuting to work across a bottleneck such as a bridge or tunnel with elastic demand with no toll there is wasteful queueing the optimal peak load toll eliminates queueing and leaves total traffic unchanged the second best uniform toll cannot eliminate queueing but reduces total traffic the second best uniform toll may be larger or smaller than the maximum value of the optimal peak load toll

installed base and compatibility innovation product preannouncements and predation a good is often more valuable to any user the more others use compatible goods the authors show that this effect may inhibit innovation if an installed base exists and transition to a new standard must be gradual early adopters bear a disproportionate share of transient incompatibility costs this can produce excess inertia the installed base however is stranded if the new standard is adopted this may create excess momentum these dynamic effects have strategic implications temporary price cutting can permanently prevent entry and product preannouncements can be critical in innovation these strategic actions have ambiguous welfare effects

salient compromises in the newsvendor game abstract the newsvendor problem denotes the puzzle that a retailer facing an uncertain demand for some product underreacts to profit margins and hence adjusts the order quantity toward the expected demand due to its range of applications in operations management this problem has drawn much interest in recent years various articles have tried to reconcile the newsvendor problem with loss aversion under ad hoc assumptions on the underlying reference point we instead argue that the newsvendor problem is an application of the well studied compromise effect as the compromise effect is based on violations of the iia axiom we argue that models of context dependent behavior such as salience theory better explain newsvendor like behavior than loss aversion based models we conduct a novel experiment which allows us to clearly distinguish between the role of loss aversion and salience and find strong support for the latter thereby we also add to the agenda of comparing loss aversion based models and salience theory

firm strategy and biased decision making the price dispersion puzzle this article confronts the empirical evidence and theoretical predictions about the correlation between price dispersion and price theoretically search and location differentiation models suggest that price dispersion is a function of search and transportation costs but is independent of the good s price empirical evidence however suggests otherwise price dispersion and price are strongly correlated this article points out the discrepancy between theory and evidence which it denotes as the price dispersion puzzle it then explains why the documented behaviour of relative thinking people behave as if their search or transportation costs are increasing in the good s price can solve the puzzle

on the psychology of loss aversion possession valence and reversals of the endowment effect loss aversion states that losses loom larger than gains we consider two types of loss aversion defined by two interpretations of loss a loss can be defined 1 in terms of valence or 2 in terms of possession correspondingly valence loss aversion vla entails greater sensitivity to negative vs positive changes and possession loss aversion pla entails greater sensitivity to items leaving vs entering one s possession both types of loss aversion imply an endowment effect for attractive items but pla implies a reversal of the endowment effect for unattractive items experimental results show endowment effect reversals consistent with pla

willingness to accept willingness to pay and the income effect abstract the gap between willingness to pay wtp and willingness to accept wta has previously been studied by searching for evidence of substitutability the neoclassical hypothesis or status quo bias testing for neoclassical versus psychological theories of preferences we study the gap differently asking whether the observed pairs of wta and wtp are consistent with neoclassical preferences we use sugden s alternatives to the neoclassical theory of choice in i bateman k g willis eds valuing environmental preferences theory and practice of the contingent valuation method in the us eu and developing countries oxford university press oxford pp 152 180 chapter 6 result showing that the effect of income on wtp can be approximated from information on the ratio wta wtp drawing inferences from a meta analysis of 201 wta wtp ratios we conclude that the data are not consistent with neoclassical preferences

disappointment in decision making under uncertainty decision analysis requires that two equally desirable consequences should have the same utility and vice versa most analyses of financial decision making presume that two consequences with the same dollar outcome will be equally preferred however winning the top prize of 10 000 in a lottery may leave one much happier than receiving 10 000 as the lowest prize in a lottery this paper explores the implications of disappointment a psychological reaction caused by comparing the actual outcome of a lottery to one s prior expectations for decision making under uncertainty explicit recognition that decision makers may be paying a premium to avoid potential disappointment provides an interpretation for some known behavioral paradoxes and suggests that decision makers may be sensitive to the manner in which a lottery is resolved the concept of disappointment is integrated into utility theory in a prescriptive model

does relative thinking exist in real world situations a field experiment with bagels and cream cheese i introduction in almost every purchase decision consumers face various alternatives which usually differ in their characteristics and prices even at the same store one could usually find various types of bread soft drinks toothpastes tv sets and so on and when considering alternative stores the number of alternatives is even larger the same applies to services in most places there are many restaurants to choose from and in each restaurant a variety of items on the menu for example because the choice between differentiated goods or services is so common it is very important to understand how consumers make these choices when a consumer faces two differentiated goods and one is preferred to the other but is also more expensive utility maximization implies that he should compare the extra utility from using the better good to the utility he can derive from using the price difference to consume other goods 1 the relative price difference between the goods should not matter only the absolute price difference matters for example suppose that there are two substitute goods the price of the less preferred one is p and the consumer tells us that he is exactly indifferent between the two goods when the preferred good costs p x then if the price of the less preferred good changes to q the consumer should be indifferent between the two goods when the preferred good costs q x 2 the reason is that the difference in utility between the two goods is fixed and so is the utility the consumer can derive by using x dollars toward consumption of other goods to illustrate this idea more vividly suppose that a consumer is indifferent between two flights where one costs 209 and leaves at 7 a m and the other costs 249 and leaves at 10 a m the consumer has to wake up a few hours before the flight in order to catch it and is willing to pay up to 40 to sleep three more hours now suppose that the consumer a month later has to choose again between two flights that are identical except for their departure time and that anything else remains unchanged except that the 7 a m flight s price is 627 the consumer should be indifferent between the two flights if the 10 a m flight costs 667 because he is willing to pay up to 40 for three more hours of sleep product differentiation can come from many sources other than departure time one simple example is the location in which the goods can be purchased if one store is more conveniently located than another and the consumer is indifferent between the two when a certain good costs 20 in one store and 25 in the other then he should also be indifferent between the two stores when buying another good that costs 270 and 275 in the two stores 3 while normatively utility maximization and well defined preferences imply that consumers should exhibit this simple principle several experiments showed that people often deviate from it and exhibit relative thinking thinking about relative price differences in addition to absolute differences azar 2004 4 tversky and kahneman 1981 for example asked people whether they would drive 20 min to save 5 on a calculator when they were going to buy a calculator and a jacket when the calculator s price was 15 and the jacket s price was 125 68 of the subjects were willing to drive but when the calculator s price was 125 and the jacket s price 15 only 29 wanted to drive 20 min to save 5 on the calculator this result was later replicated in several other studies mowen and mowen 1986 showed that the effect holds similarly for student subjects and for business managers frisch 1993 showed that the effect holds also when only a calculator is being purchased ranyard and abdel nabi 1993 varied the price of the second item the jacket and obtained similar results and darke and freedman 1993 found that both the percentage discount and the absolute discount have an effect on consumer choice

demand shifts due to salience effects experimental evidence we conduct a laboratory experiment that tests two fundamental predictions unique to salience theory if an agent purchases one of two vertically differentiated products salience theory makes the following two distinct predictions first it hypothesizes that a higher expected price level for both products shifts demand toward the more expensive high quality product second it predicts that demand for the high quality product is larger if the price level is expectedly high than if it is unexpectedly high in our experiment subjects purchased fast or slow internet access at different price levels our results strongly support both predictions of salience theory

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

fiscal policy in a growth model with both altruistic and nonaltruistic agents this paper examines the long run behavior of an overlapping generations model with a population consisting of altruistic and nonaltruistic agents it also studies the effect of fiscal policy on aggregate capital accumulation and on the welfare of both types of agents it shows that an increase in the relative number of nonaltruists is pareto improving in the steady state it also shows that the introduction of public debt or unfunded social security has no effect on the longrun equilibrium but implies a transfer of resources from the nonaltruistic to the altruistic agents finally it indicates that inheritance taxation hurts not only the altruists but also the nonaltruists

the uncertainty effect when a risky prospect is valued less than its worst possible outcome expected utility theory prospect theory and most other models of risky choice are based on the fundamental premise that individuals choose among risky prospects by balancing the value of the possible consequences these models therefore require that the value of a risky prospect lie between the value of that prospect s highest and lowest outcome although this requirement seems essential for any theory of risky decision making we document a violation of this condition in which individuals value a risky prospect less than its worst possible realization this demonstration which we term the uncertainty effect draws from more than 1000 experimental participants and includes hypothetical and real pricing and choice tasks as well as field experiments in real markets with financial incentives our results suggest that there are choice situations in which decision makers discount lotteries for uncertainty in a manner that cannot be accommodated by standard models of risky choice from the time of bernoulli on it has been common to argue that a individuals tend to display aversion to the taking of risks and b that risk aversion in turn is an explanation for many observed phenomena in the economic world arrow 1971 p 90

can t buy me love subsidizing the care of related children abstract this paper uses a reform in illinois that reduced the monthly subsidy offered to relatives asked to provide foster care as a plausibly exogenous change in the cost of caring for related children families offered a 30 lower wage were 15 less likely to provide care with especially large declines for children who require mental health services infants and teenagers one innovation is a sample selection model that uses the foster care placement tendency of child protection investigators to predict entry into the sample an instrument that should be unrelated to family characteristics due to a rotational assignment process that effectively randomizes investigators to families meanwhile child health education and placement outcomes do not appear to suffer following the decline in the subsidy offer consistent with similar quality levels among marginal kin and non kin caregivers

the welfare gains from pricing road congestion using automatic vehicle identification and on vehicle meters it is a widely accepted proposition that there is a general underpricing of auto travel in u s cities auto travel imposes a congestion externality with an efficient peak period level estimated at lo 23t per mile on urban freeways small 1121 2 3 but for most urban auto travel tolls consist almost entirely of the gasoline excise tax at a fuel economy of 15 miles per gallon the auto toll implied by the current high gas tax in the united states of 25e per gallon is only 1 7e per mile this is much too low for most peak period travel and even underprices some off peak travel the purpose of this study is to estimate the welfare gains which are possible under different regimes for imposing higher auto tolls in urban areas the three regimes studied are associated with a higher gas tax and systems called automatic vehicle identification and on vehicle metering the framework for the study is a model of a city whose shape is that of a wedge or pie slice of a circle the model s features include

exchange asymmetries for bads experimental evidence abstract this study provides the first incentivized test of exchange asymmetries for unpleasant items the so called bads while prospect theory predicts an endowment effect for goods and bads attention based theories predict an endowment effect for goods but a reverse exchange asymmetry that is a particularly high willingness to switch for bads the investigation of exchange asymmetries for bads is a key element to distinguish between the validity of loss aversion and attention based theories as we find a strong endowment effect for bads our results speak in favor of prospect theory

salience and consumer choice we present a theory of context dependent choice in which a consumer s attention is drawn to salient attributes of goods such as quality or price an attribute is salient for a good when it stands out among the good s attributes relative to that attribute s average level in the choice set or more broadly the choice context consumers attach disproportionately high weight to salient attributes and their choices are tilted toward goods with higher quality price ratios the model accounts for a variety of disparate evidence including decoy effects and context dependent willingness to pay it also suggests a novel theory of misleading sales

airport pricing congestion tolls lumpy investment and cost recovery abstract in this paper we investigate the relationship between congestion tolls and capacity expansion costs for congestion prone transportation infrastructures with lumpy investment with constant variable costs and social marginal cost pricing this relationship determines the cost recovery status of an infrastructure authority the theoretical model for optimal user charges and the timing of capacity expansion shows that the relative magnitudes of total congestion tolls and total capacity costs in an investment cycle depend on the time pattern of traffic growth a point overlooked in the literature a queuing model is used to conduct a numerical experiment to determine the cost recovery ratios under various time paths of traffic growth

optimal road capacity in the presence of unpriced congestion abstract this paper studies how the optimal capacity of a road is affected by a pricing constraint which keeps the toll fixed below its optimal value the answer is found to depend on the value of the price elasticity of travel demand at the second best optimum the pricing constraint lowers the optimal capacity if the price elasticity is sufficiently high but under reasonable assumptions the pricing constraint raises the optimal capacity if the price elasticity is less than the ratio of the consumer price of travel to the private congestion cost at the second best optimum this ratio cannot be less than one

loss aversion in a consumption savings model abstract we propose a model of consumption and saving based on kahneman and tversky s prospect theory that implies a fundamental asymmetry in consumption behavior inconsistent with other models of consumption when there is sufficient income uncertainty a person resists lowering consumption in response to bad news about future income this resistance is greater than the resistance to increasing consumption in response to good news we present empirical evidence from five countries that confirms this behavior

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

conceptual developments in the economics of transportation an interpretive survey the objective in this paper is to survey the literature in transportation economics exploring two basic themes first the conceptual developments in the analysis of supply and demand which recognizes noteworthy aggregation biases in the empirical work on aggregate data and indicate that a correct analysis of the issues should take place at a highly disaggregated level second the use of these conceptual developments to evaluate efficiency aspects of transportation pricing investment and the impact of government regulation on resource allocation and distribution in the transportation sector it is important to acknowledge that the survey is based on research throughout the world but our institutional perspective and to some extent the topics that are covered is based largely on the u s experience author

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

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

technology adoption in the presence of network externalities we analyze technology adoption in industries where network externalities are significant the pattern of adoption depends on whether technologies are sponsored a sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it key findings include the following 1 compatibility tends to be undersupplied by the market but excessive standardization can occur 2 in the absence of sponsors the technology superior today has a strategic advantage and is likely to dominate the market 3 when one of two rival technologies is sponsored that technology has a strategic advantage and may be adopted even if it is inferior 4 when two competing technologies both are sponsored the technology that will be superior tomorrow has a strategic advantage

the role of altruism in economic interaction abstract this paper considers environments in which the population consists of a mix of altruists and egoists and asks under what situations do altruists have a disproportionately large effect on equilibrium and under what situations is it the egoists we begin by presenting a general framework for answering this question we then apply the framework to the analysis of three economic environments 1 the classic problem referred to as the prisoner s dilemma 2 a world where agents decide whether or not to pollute the environment and 3 a world where agents decide whether or not to donate blood

equilibrium price dispersion in retail markets for prescription drugs this study seeks to establish the empirical importance of price dispersion due to costly consumer search by examining retail prices for prescription drugs posted prices in two geographically distinct markets are shown to vary considerably across pharmacies within the same market even after one controls for variation due to pharmacy differences pharmacy heterogeneity accounts for at most one third of the observed price dispersion the empirical analysis hinges on the observation that consumers incentives to price shop depend on characteristics of the drug therapy cross sectional patterns in price distributions across drugs are consistent with the predictions of a search model prices for repeatedly purchased prescriptions for which the expected benefits of search are highest exhibit significant reductions in both dispersion and price cost margins

a model of focusing in economic choice we present a generally applicable theory of focusing based on the hypothesis that a person focuses more on and hence overweights attributes in which her options dier more our model predicts that the decisionmaker is too prone to choose options with concentrated advantages relative to alternatives but maximizes utility when the advantages and disadvantages of alternatives are equally concentrated in intertemporal choice because the relative concentrations of an option s costs and benets can be dierent from the perspective of a single period and the perspective of the entire choice problem the decisionmaker often exhibits a form of time inconsistency she is present biased when the costs of current misbehavior are distributed over many future dates such as in harmful consumption but future biased when the benet of many

psychological expected utility theory and anticipatory feelings we extend expected utility theory to situations in which agents experience feelings of anticipation prior to the resolution of uncertainty we show how these anticipatory feelings may result in time inconsistency we provide an example from portfolio theory to illustrate the potential impact of anticipation on asset prices

limited rationality and strategic complements the implications for macroeconomics this paper considers the implications of heterogeneity in information processing abilities for macroeconomic models that exhibit strategic complements the latter is the same concept that has received much attention in the recent macro literature under the headings keynesian coordination problems and positive trading externalities we consider environments in which agents vary in terms of their ability to form expectations and ask whether it is the sophisticated agents or the naive agents who have a disproportionately large effect on macroeconomic equilibrium we find that if macroeconomic interaction exhibits strategic complementarity then it is the naive agents who have a disproportionate impact

the economic effects of non optimal pricing and investment policies for substitutable transport facilities a dynamic simulation model of subbstitutable transportation facilities demonstrated the welfare revenue and capacity implications of various non optimal pricing and investment policies applications to a major airport and an urban transportation system an expressway and a subway showed that in both cases the welfare surface surrounding the optimal policy is relatively flat for a substantial range and that existing policies are also on this range for both transportation systems a policy of financial self sufficiency is on this range for the airport but not for the urban transportation system author

indivisibilities economies of scale and optimal subsidy policy for freeways in our 1976 paper herbert mohring thomas pinfold and i attempted to quantify optimal congestion tolls volume capacity ratios and subsidies for freeways in doing so we made the simplifying assumption of perfectly divisible traffic lanes of course freeway lanes are not divisible and with two to four lanes typically provided in each direction the size of the indivisibility is large this paper quantifies optimal freeway characteristics with indivisibilities taken into account we find that failure to account for indivisibilities can lead to

exchange asymmetries incorrectly interpreted as evidence of endowment effect theory and prospect theory systematic asymmetries in exchange behavior have been widely interpreted as support for endowment effect theory an application of prospect theory positing that loss aversion and utility function kinks set by entitlements explain observed asymmetries we experimentally test an alternative explanation namely that asymmetries are explained by classical preference theories finding influence through the experimental procedures typically used contrary to the predictions of endowment effect theory we observe no asymmetries when we modify procedures to remove the influence of classical preference theories when we return to traditional type procedures however the asymmetries reappear the results support explanations based in classical preference theories and reject endowment effect theory

if homo economicus could choose his own utility function would he want one with a conscience reply in my model of the evolution of honesty 1 i assumed the existence of a signal a blush perhaps extreme values of which served to identify some individuals as being honest with certainty joseph harrington notes that without this assumption honest individuals have difficulty invading a population initially dominated by defectors for readers who do not wish to work through the algebra in his comment the argument is easily summarized in nontechnical terms suppose two honest mutants a and b arrive in an uncountably large population consisting entirely of dishonest persons and suppose that the probability that an honest person exhibits an intense blush is say 0 999 while the corresponding probability for everyone else is only 0 001 when a sees an intense blush on the face of b what will then be his estimate of the probability that b is honest assuming that a knows the laws of elementary probability and corrects for the base rate of honest persons in the population it will be zero when virtually everyone in the population is dishonest even a person with an intense blush will be pegged as dishonest provided that even the smallest fraction of dishonest persons also shows an intense blush with

honesty in a regulatory context good thing or bad abstract it is often taken for granted that if more firms were innately honest or ethical this would be a good thing we use the example of pollution policy to dispute such a claim if regulation is by pollution tax social welfare is non monotonic in population honesty the choice of policy instrument may itself be characterised by reversals with command and control methods being preferred for intermediate values of population honesty a tax system being preferred at the extremes this means that if because of the spread of ethical shareholding or for whatever reason the honesty of the corporate population increases through time we should not be surprised to see at first a switch away from market based instruments and then a switch back though environmental regulation is chosen as a context the implications are more general

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

reconsidering the effect of market experience on the endowment effect simple exchange experiments have revealed that participants trade their endowment less frequently than standard demand theory would predict list 2003a finds that the most experienced dealers acting in a well functioning market are not subject to this exchange asymmetry suggesting that a significant amount of market experience is required to overcome it in order to understand this market experience eect we introduce a distinction between two types of uncertainty choice uncertainty and trade uncertainty both of which could lead to exchange asymmetry we conjecture that trade uncertainty is most important for exchange asymmetry to test this conjecture we design an experiment where the two treatments impact dierently on trade uncertainty while controlling for choice uncertainty supporting our conjecture we find that forcing subjects to give away their endowment in a series of exchanges eliminates exchange asymmetry in a subsequent test we discuss why markets might not provide sucient

responders versus non responders a new perspective on heterogeneity this paper considers the implications of a particular type of heterogeneity one which characterizes a large number of economic environments but that has not received any systematic treatment in the literature the authors refer to this heterogeneity as responders versus nonresponders the paper begins by providing a general framework for the analysis of environments characterized by this heterogeneity and then shows how this framework can be used to help understand a wide variety of economic environments particular applications considered are near rationality network externalities and models of reputation copyright 1991 by royal economic society

willingness to pay and compensation demanded experimental evidence of an unexpected disparity in measures of value aside from possible income effects measures of the maximum amounts people will pay to avoid a loss and the minimum compensation necessary for them to accept it are generally assumed to be equivalent unexpectedly wide variations between these sums however have been noted in survey responses to hypothetical options this paper reports the results of a series of experiments that confronted people with actual money payments and cash compensations the results indicate that the compensation measure of value seems to exceed significantly the willingness to pay measure which would appear to call into some question various rules of entitlement damage assessments and interpretations of indifference curves

revenue recycling and the welfare effects of road pricing the authors explore the interaction between taxes on work related traffic congestion and preexisting distortionary taxes in the labor market a congestion tax raises the overall costs of commuting to work and discourages labor force participation at the margin when revenues are returned in lump sum transfers the resulting efficiency loss in the labor market can be larger that the pigouvian efficiency gains from internalizing the congestion externality by contrast if congestion tax revenues are used to reduce labor taxes the net impact on the labor supply is positive and the efficiency gain in the labor market can raise the overall welfare gains of the congestion tax by as much as 100 percent recycling congestion tax revenues in public transit subsidies produces a positive but smaller impact on the labor supply in short the authors results indicate that the presence of preexisting tax distortions and the form of revenue recycling can crucially affect the size and possibly even the sign of the welfare effect of road pricing schemes the efficiency gains from recycling congestion tax revenues in other tax reductions can amount to several times the pigouvian welfare gains from congestion reduction

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

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

economics of a bottleneck abstract drawing on vickrey amer econ rev 59 251 261 1969 and subsequent literature this paper provides a thorough economic analysis of the simplest bottleneck model of road congestion with peak load demand in the morning rush hour a fixed number of identical individuals one per car must travel from home to work between which is a bottleneck of given capacity the costs of travel include queuing time and schedule delay time early or late for work the frequency distribution of departure times adjusts so that in equilibrium all individuals have the same travel costs the paper extends the previous literature by examining a coarse toll and solving for optimal capacities the application of congestion tolls can generate efficiency gains by altering the frequency distribution of departure times previous estimates of the efficiency gains from congestion tolling are likely to be substantially downward biased because they have ignored this effect