a search theoretic model of legal and illegal currency abstract using a search theoretic model of money we explore the conditions under which two currencies domestic and foreign will co exist despite legal restrictions on the use of foreign currency for internal trade we study how changes in government policy i e its enforcement of currency laws through fines or the rate of enforcement affects the acceptability of illegal currency the equilibrium value of both currencies and the implicit exchange rate first we construct a model with indivisible goods to show conditions under which legal currency is fully acceptable but illegal currency circulates with varying acceptability we then introduce bargaining to determine prices in legal and illegal currency we show that some enforcement polices can create multiple equilibria while others will not also some methods of enforcement are capable of driving the illegal currency out of circulation while others are not

what are asset demand tests of expected utility really testing assuming the classic contingent claim setting a number of financial asset demand tests of expected utility have been developed and implemented in experimental settings however the domain of preferences of these asset demand tests differ from the mixture space of distributions assumed in the traditional binary lottery laboratory tests of von neumann morgenstern expected utility preferences we derive new sets axioms that are necessary and sufficient for preferences over contingent claims to be representable by an expected utility function we also indicate the additional axioms required to extend the representation to the more general case of preferences over risky prospects

risk preferences are not time preferences balancing on a budget line comment in a recent experimental study of intertemporal risky decision making andreoni and sprenger 2012 find that subjects exhibit a preference for intertemporal diversification which is inconsistent with discounted expected utility theory it was claimed that their results are also at odds with models involving probability weighting such as rank dependent utility and cumulative prospect theory here we demonstrate however that rank dependent probability weighting explains intertemporal diversification if decision makers care about portfolio risk moreover we provide a unified account of all of andreoni and sprenger s key findings

a model of the liquidity structure based on asset indivisibility abstract although the notion of a liquidity structure of asset yields is widely accepted there do not seem to be models of such a structure here the liquidity of an asset is taken to be its transaction velocity the amount traded per unit time divided by the stock assets are assumed to be indivisible and to differ in size trade using such assets is implied by pairwise matching and absence of double coincidence in produced goods it is shown that a sufficiently large asset has a lower velocity and a higher yield than a sufficiently small asset

second price auctions without expected utility abstract expected utility maximizers bid according to dominant strategies in second price auctions for risky prizes bids are independent of the number of other bidders or the reserve price the optimal reserve price is independent of the number of bidders and ascending bid and second price auctions generate the same expected revenue if expected utility fails none of these results remain true and symmetric equilibria may not be unique if fanning in and betweenness hold uniquenes is restored bids fall when the number of bidders or the reserve price increases and second price auctions generate higher bids than ascending bid auctions journal of economic literature classification numbers d81 d44

allais paradox in the small three small payoff variants on the famous allais paradox questions were presented to 202 subjects for each variant the probabilities were the same as in the original allais questions only the payoffs differed in one variant the payoffs were proportional reductions of the original allais payoffs for this variant for both hypothetical and real payoffs the allais paradox behavior largely disappeared in favor of simple expected value maximization a second variant involved negative payoffs results were roughly the same the third variant involved payoffs for which the lotteries had nearly the same expected values something closer to allais paradox behavior was found for this variant when payoffs were real but not when payoffs were hypothetical overall behavior was closer to simple expected value maximization when payoffs were real than when they were hypothetical

reduction of compound lotteries with objective probabilities theory and evidence abstract the reduction of compound lotteries axiom rocl has assumed a central role in the evaluation of behavior toward risk and uncertainty we present experimental evidence on its validity in the domain of objective probabilities our battery of lottery pairs includes simple one stage lotteries two stages compound lotteries and their actuarially equivalent one stage lotteries we find violations of rocl and that behavior is better characterized by a source dependent version of the rank dependent utility model rather than expected utility theory since we use the popular 1 in k random lottery incentive mechanism payment procedure in our main test our experiment explicitly recognizes the impact that this payment procedure may have on preferences thus we also collect data using the 1 in 1 payment procedure we do not infer any violations of rocl when subjects are only given one decision to make these results are supported by both structural estimation of latent preferences as well as non parametric analysis of choice patterns the random lottery incentive mechanism used as payment protocol itself induces an additional layer of compounding by design that might create confounds in tests of rocl therefore we provide a word of caution for experimenters interested in studying rocl for other purposes such as the relationship between ambiguity attitudes and attitudes toward compound lotteries to carefully think about the design to study rocl payment protocols and their interaction with the preferences being elicited

the markowitz model of utility supplemented with a small degree of probability distortion as an explanation of outcomes of allais experiments over large and small payoffs and gambling on unlikely outcomes we show that in principal only a small degree of probability distortion is necessary for agents to exhibit the allais paradox we also show that the choices observed in the allais experiments employing small real payoffs cannot be explained by cumulative prospect theory without the assumption of low degrees of probability distortion that rule out gambling at unfair odds on all but the most extreme longshots in cpt given these points we show that the markowitz model of utility supplemented by a small degree of probability distortion can explain the majority choices involved allais experiments and other experiments as well as gambling at actuarially unfair odds

information characteristics and errors in expectations experimental evidence we design an experiment to test the hypothesis that in violation of bayes rule some people respond more forcefully to the strength of information than to its weight we provide incentives to motivate effort use naturally occurring information and control for risk attitude we find that the strength weight bias affects expectations but that its magnitude is significantly lower than originally reported controls for non linear utility further reduce the bias our results suggest that incentive compatibility and controls for risk attitude considerably affect inferences on errors in expectations

persistent protection in an international exit game abstract this paper examines the strategic behavior of two countries in a duopoly exit game with declining demand in the export market we consider whether countries have a strategic rational to maintain rather than unilaterally or jointly reduce their subsidies conditions under which persistent subsidization is justified from a national perspective are derived by maintaining subsidies one country can gain a strategic advantage by forcing its rival to exit earlier an outcome where only one country applies the subsidy is not attainable free trade is less likely to occur close to the end of the game

generalized disappointment aversion and asset prices we characterize generalized disappointment aversion gda risk preferences that can overweight lower tail outcomes relative to expected utility we show in an endowment economy that recursive utility with gda risk preferences generates effective risk aversion that is countercyclical this feature comes from endogenous variation in the probability of disappointment in the representative agent s intertemporal consumption saving problem that underlies the asset pricing model the variation in effective risk aversion produces a large equity premium and a risk free rate that is procyclical and has low volatility in an economy with a simple autoregressive endowment growth process the observed facts of aggregate risks and asset prices in the post war u s economy have led researchers to explore models of intertemporal preferences that generalize the well developed time additive expected utility specification used in the asset pricing economy of lucas 1978 in particular models that allow for countercyclical risk aversion have been shown to perform much better than the standard model see e g campbell and cochrane 1999 gordon and st amour 2000 and barberis huang and santos 2001 1 this leads us to explore the preference foundations that may produce this behavior endogenously our preference specification is a one parameter extension of the gul 1991 disappointment aversion utility function these new preferences

framing the allais paradox as a daily farm decision problem tests and explanations the well known allais paradox is reformulated as a daily farm decision problem only 26 of the farmers exhibit violations of the expected utility hypothesis moreover the tendency for violation decreases with the farm operator s education experience and family size no effects of the farm main crop or its scale were detected finally when taking into account the possibility of choice errors we find that the violation rate is statistically insignificant

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

violence and risk preference experimental evidence from afghanistan we investigate the relationship between violence and economic risk preferences in afghanistan combining i a two part experimental procedure identifying risk preferences violations of expected utility and specific preferences for certainty ii controlled recollection of fear based on established methods from psychology and iii administrative violence data from precisely geocoded military records we document a specific preference for certainty in violation of expected utility the preference for certainty which we term a certainty premium is exacerbated by the combination of violent exposure and controlled fearful recollections the results have implications for risk taking and are potentially actionable for policymakers and marketers

government transaction policy and gresham s law abstract a search theoretic model is used to study how legal restrictions may account for the fact that gresham s law sometimes holds but other times fails legal restrictions is modeled here as policies that government adopts in the transactions with private agents such as at what prices it accepts a currency in exchange for goods and at what ratios it conducts currency exchange a government policy sufficiently favorable to light coins can induce the existence of an equilibrium where both coins circulate and light coins are even accepted at a premium a policy favorable to heavy coins may increase their value to such an extent that they are hoarded from circulation when this equilibrium did not exist without interventions

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

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

coexistence of money and interest bearing securities abstract a random matching model with money is used to study the nominal yield on small denomination bearer safe discount securities issued by the government there is always one steady state with matured securities circulating at par and for some parameters another with them circulating at a discount in the former a necessary and sufficient condition for a positive nominal yield on not yet matured securities is exogenous discriminatory treatment of them by the government in the latter the post maturity discount on securities induces a deeper pre maturity discount even without such discriminatory treatment

quantifying the allais paradox abstract weighted linear utility explains allais paradox yet preserves much of the analytic structure of standard expected utility this paper identifies the two crucial parameters of weighted linear utility risk aversion and eccentricity eccentricity is a measure of how much the decision maker systematically distorts the probabilities in choosing between lotteries

currency exchange in a random search model this paper investigates foreign exchange trading a phenomenon that typically accompanies international trade a search theoretic general equilibrium approach is adopted to study a two country two currency model for some parameter values of the model there exist some pure strategy equilibria in which commodity currency trade is conducted primarily through local currency and in which there is active currency currency exchange the coexistence of valued foreign currency and its local non acceptability conforms largely with the country specific cash in advance constraint that is often assumed exogenously in international finance literature

toward a theory of international currency we use the framework of random matching games and develop a two country model of the world economy in which two national currencies compete and may be circulated as media of exchange there are multiple equilibria which differ in the areas of circulation of the two currencies in one equilibrium the two national currencies are circulated only locally in another one currency is circulated as an international currency there is also an equilibrium in which both currencies are accepted internationally we also find an equilibrium in which the two currencies are directly exchanged we first characterize the existence conditions of these equilibria in terms of the relative country size and the degree of economic integration and then use an evolutionary approach to equilibrium selection to explain the evolution of the international currency as the two economies become more integrated some welfare implications are also discussed for example a country can improve its national welfare by letting its own currency circulate internationally provided the domestic circulation is controlled for when the total supply is fixed however a resulting currency shortage may reduce the national welfare

the common consequence effect testing a unified explanation of recent mixed evidence abstract the common consequence effect is perhaps the most investigated violation of expected utility theory and yet no single generalised expected utility model convincingly organises the experimental data this paper reports a test of a modified version of expected cardinality specific utility theory with boundary effects neilson w s 1992 economics letters 39 275 278 which can explain some recent mixed evidence without recourse to subjective probability weighting models the results do not convincingly support the boundary effect hypothesis and neither support the more usual probability weighting arguments but do indicate instability in preferences largely consistent with event splitting effects

a model of commodity money abstract commodity money is modeled as one or two of the capital goods in a one consumption good and one or two capital good overlapping generations model among the topics addressed using versions of the model are i the nature of the inefficiency of commodity money ii the validity of quantity theory predictions for commodity money systems iii the circumstances under which one commodity emerges naturally as the commodity money iv the role of inside money money backed by private debt in commodity money systems and v the circumstances under which a government can choose the commodity to serve as the commodity money

cautious expected utility and the certainty effect many violations of the independence axiom of expected utility can be traced to subjects attraction to risk free prospects the key axiom in this paper negative certainty independence dillenberger 2010 formalizes this tendency our main result is a utility representation of all preferences over monetary lotteries that satisfy negative certainty independence together with basic rationality postulates such preferences can be represented as if the agent were unsure of how to evaluate a given lottery p instead she has in mind a set of possible utility functions over outcomes and displays a cautious behavior she computes the certainty equivalent of p with respect to each possible function in the set and picks the smallest one the set of utilities is unique in a well dened sense we show that our representation can also be derived from a cautious completion of an incomplete preference relation

introducing a new currency government policy and prices abstract the aim of this article is to study the introduction of a new fiat currency within a dual currency divisible goods search model the government using price control or legal tender laws can affect the equilibrium price levels of two domestic currencies with the goal of driving the old currency out of circulation and replacing it with a new one it is shown that some equilibrium solutions that exist in a laissez faire environment disappear with government monitoring additionally when the old currency is made illegal its equilibrium value is affected differently by public measures such as conversion tax and redistribution policies finally if the enforcement power of legal tender laws is strong enough the old currency cannot be more valuable than the new one and the probability that it changes hands in trade when introducing lotteries cannot be smaller than one

gresham s law or gresham s fallacy gresham s law often takes two forms the rule that bad money drives out good money and a qualified version of that rule that requires a fixed exchange rate between the two monies yet history contr

gresham s law in nineteenth century america this paper examines several nineteenth century american tests of gresham s law these tests include both the conflict between the u s silver dollar and foreign silver dollars in the early national period and the conflict between the greenback dollar and the gold dollar during the civil war and its aftermath the authors find that gresham s law worked well and that a rival view which considers the natural outcome of such conflicts to be the concurrent circulation of cheap money at face value and dear money at a varying premium did not copyright 1995 by ohio state university press

government transaction policy the medium of exchange and welfare abstract policy regarding what the government accepts in transactions is embedded in a version of the kiyotaki wright model of media of exchange in an example with two goods and one fiat money the policies that are consistent with fiat money as the unique medium of exchange are identified these policies have the government favoring fiat money in its transactions a benefit and a cost accompany any such policy the benefit is that a worse nonmonetary steady state is eliminated the cost is that a better monetary steady state is eliminated journal of economic literatureclassification number e40

testing new theories of choice under uncertainty using the common consequence effect a generalised common consequence problem is used to contrast the predictions of expected utility theory and several new theories of choice under uncertainty an experiment designed to test these predictions is reported systematic violations of expected utility theory are detected but although a consistent pattern emerges from the data it offers little support for any of the new theories the analysis is extended to test predictions which are unique to regret theory and significant regret effects are detected

a model of a currency shortage abstract until the mid 19th century shortages of currency were common moreover a frequent policy response was a prohibition on the export of coins we use a random matching model with indivisible money to explain a shortage and to judge the desirability of a prohibition on the export of coins the model although extreme in many regards represents better than earlier models a demand for outside money and the problems that arise when that money is indivisible it can also rationalize a prohibition on the export of money

children s rationality risk attitudes and field behavior abstract we investigate the relationship between risk attitudes choice consistency and field behavior of children by conducting economic experiments with 1275 8th graders choices are not completely consistent with any of the economic theories we consider however they are not random either we use our experimental data to structurally estimate risk preferences and correct for decision error using a measure constructed from the estimates and individual choices we find that risk preferences do predict future field behavior children who are more risk averse are less likely to receive disciplinary referrals one and two years after the experiment and are more likely to complete high school even controlling for economic rationality family background scholarly achievement and past misbehavior accounting for decision error turns out to be important as a simple aggregate measure of risk is not found to be correlated with field behavior

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

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

animals choices over uncertain outcomes further experimental results the betweenness axiom of expected utility theory which is not required under several nonexpected utility formulations is examined choices are checked for independence axiom violations in the allais direction and for fanning out in little explored areas of the unit probability triangle as predicted by machina s hypothesis ii the data show allais type violations of the independence axiom systematic failure of the fanning out hypothesis in the northwest portion of the unit probability triangle and consistent violations of the betweenness axiom in favor of folded orderings results are related to findings from human choice experiments exploring similar phenomena copyright 1991 by royal economic society

nonlinear preferences and two stage lotteries theories and evidence nonlinear preferences models are theories for choice under risk which have weakened in one way or another the independence axiom of expected utility in this paper we present an experiment designed to discriminate between some basic ideas in this literature we tested the betweenness axiom a weaker form of independence against an alternative which predicts that indifference curves in the probabilities simplex are convex along the lower edge and concave along the hypotenuse we also checked whether preferences among single stage lotteries as those revealed by our test of betweenness should be extended to preferences among two stage lottery via the classical reduction of compound lottery axiom or via the certainty equivalent mechanism copyright 1994 by royal economic society

government transaction policy media of exchange and prices abstract we study government transaction policies in search theoretic models of money we model government as a subset of agents who are subject to the same random matching technology and other constraints as private agents but who behave in an exogenous way regarding which objects they accept in trade and at what price the objective is to see how these policies affect private agents strategies and hence the set of equilibria we analyze how the effects depend on factors like the size of government the intrinsic properties of money and the availability and efficacy of substitutes like barter or foreign currency journal of economic literature classification numbers c78 e31 e42

a mixed fan hypothesis and its implications for behavior toward risk in order to accommodate recent experimental evidence which questions the validity of the fanning out hypothesis a mixed fan hypothesis is proposed the hypothesis combines fanning out for the less preferred region of probability triangles with fanning in for the more preferred region and is defined over general probability spaces the relevance of fanning hypotheses for economic analysis is illustrated with an asset demand example and a new method for testing for fanning behavior is proposed

three variants on the allais example three variants on the famous allais example were administered to student subjects two variants involved small changes in the example yet greatly diminished the qualitative behavior known as the allais paradox the third variant is almost a direct test of daniel kahneman and amos tversky s certainty effect against mark machina s fanning out hypothesis the results favor the certainty effect over the fanning out hypothesis for at least the case of straight line indifference curves copyright 1989 by american economic association

biological correlates of the allais paradox we conducted a questionnaire study with student subjects to look for explicit correlations between selected biological characteristics of the subjects and manifestation of the allais paradox in the pattern of their choices between sets of two pairs of risky prospects we found that particular characteristics such as gender menstrual cycle mother s age at delivery parenthood second to fourth digit ratio perceived negative life events and emotional state can be related to the paradox women particularly when not menstruating are less susceptible to the paradox those born to not too young mothers are also less prone to the paradox the same holds true for men who have fathered children and had been exposed to high levels of prenatal testosterone people who had experienced many negative life events and those who were anxious excited aroused happy active or fresh at the time of the experiment further left handers and atheists may be less inclined to display the paradox