Exploring Modifications to the Perception of Economic Agents: Impartial, Farsighted, and Optimistic Perspectives
Creators: name: Berens, Stefan
Publisher: name: Universität Bielefeld
Year: 2019
Subjects: subject: 330

description: In this thesis, we explore three modifications to the perception of economic agents. Our work introduces impartial, farsighted, and optimistic perspectives to economic frameworks about decision-making under uncertainty, the formation of global trade agreements, and the funding of entrepreneurs respectively.<br><br> First, we extend Harsanyi's Impartial Observer Theorem by introducing Knightian Uncertainty in the form of individual belief systems. It features an axiomatic framework of societal decision-making in the presence of individual uncertainty. The model allows the analysis of scenarios where individuals agree on the ranking but not on the likelihood of social outcomes. The preferences of the impartial observer are represented by a weighted sum of utilities - each representing individual preferences with different belief systems. In order to incorporate common criticism of the framework of Harsanyi (1953), our approach is based on the generalized version by Grant et al. (2010). The belief systems are introduced as second-order beliefs following Seo (2009). <br><br> Second, we study and compare the stability of trade policy arrangements in two different regulatory scenarios, one with and one without Preferential Trade Agreements (PTAs), i.e. current vs. modified WTO rules. Unlike the existing literature, our work considers an extensive choice set of trade constellations, containing both available PTAs, Customs Unions (CUs) and Free Trade Agreements (FTAs), as well as Multilateral Trade Agreements (MTAs), while assuming unlimited farsightedness of the negotiating parties. With symmetric countries and under both the current and the modified WTO rules, the Global Free Trade (GFT) regime emerges as the unique stable outcome. In the case of asymmetry, the results are driven by the relative size of the countries. If the world is in the vicinity of symmetry and two out of three countries are close to identical while relatively smaller than the other one, the area where the GFT regime is stable increases when prohibiting PTAs. However, when two similar countries are relatively larger, the availability of PTAs is conducive to the stability of the GFT regime. Finally, if the world is further away from symmetry, full trade liberalization is not attainable at all and an area where the Most-Favoured-Nation (MFN) regime is stable appears in the scenario without PTAs. Thus, the direction of the effect of PTAs on trade liberalization depends on the degree of asymmetry among countries.<br><br> Third, we consider a project of unknown quality that is available to an entrepreneur and requires both funding and effort to be realized. The entrepreneur is either of optimistic or realistic type and accordingly receives a distorted signal about the quality of the project. The entrepreneur is aware of the potential bias but ultimately believes to be a realist. In terms of funding, the entrepreneur has access to two different sources of funding, namely a bank and a venture capitalist. The banks only contribution is the funding, while the venture capitalist is on top of that able to invest effort into the project. Similarly, the entrepreneur can provide additional effort both in advance and simultaneously with the venture capitalist. Our work ultimately characterizes different constellations of the model parameters under which an increase in the share of overconfidence leads to an increase in social welfare.