We study the demand for retirement products given access to innovative plans which depend on the realized survival probabilities, like tontines, in addition to traditional annuities. Preferences of agents are modeled by a generalized life-cycle utility function allowing for temporal risk aversion. We identify conditions for pricing bounds under which agents subject to temporal risk aversion prefer to invest positive fractions of wealth in both annuities and tontines to full annuitization. In an extended model with differential mortality and wealth, we analyze a utilitarian social planner's retirement product demand, focusing on wealth transfers between the groups.
{"title":"Demand for Retirement Products: An Analysis of Individual Welfare","authors":"A. Chen, Manuel Rach","doi":"10.2139/ssrn.3921579","DOIUrl":"https://doi.org/10.2139/ssrn.3921579","url":null,"abstract":"We study the demand for retirement products given access to innovative plans which depend on the realized survival probabilities, like tontines, in addition to traditional annuities. Preferences of agents are modeled by a generalized life-cycle utility function allowing for temporal risk aversion. We identify conditions for pricing bounds under which agents subject to temporal risk aversion prefer to invest positive fractions of wealth in both annuities and tontines to full annuitization. In an extended model with differential mortality and wealth, we analyze a utilitarian social planner's retirement product demand, focusing on wealth transfers between the groups.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131312654","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we study a general model of information acquisition: costly Bayesian learning. Using a menu choice framework, we provide an axiomatic characterization of the model, identify its parameters (a utility function, an increasing transformation, a second-order prior belief, and an information cost function), and behaviorally compare the costs. Our results show that the rational inattention model, which has found various applications in the literature, is a special case of the costly Bayesian learning model. We identify several behavioral conditions each of which can be used to test if the decision maker is rationally inattentive or is of a more general type Bayesian learner including those who exhibit aversion to uncertainty. We argue that our decision makers can have flexible attitudes towards the timing of resolution of uncertainty.
{"title":"Preferences with Costly Bayesian Learning","authors":"Kemal Ozbek","doi":"10.2139/ssrn.3919508","DOIUrl":"https://doi.org/10.2139/ssrn.3919508","url":null,"abstract":"In this paper, we study a general model of information acquisition: costly Bayesian learning. Using a menu choice framework, we provide an axiomatic characterization of the model, identify its parameters (a utility function, an increasing transformation, a second-order prior belief, and an information cost function), and behaviorally compare the costs. Our results show that the rational inattention model, which has found various applications in the literature, is a special case of the costly Bayesian learning model. We identify several behavioral conditions each of which can be used to test if the decision maker is rationally inattentive or is of a more general type Bayesian learner including those who exhibit aversion to uncertainty. We argue that our decision makers can have flexible attitudes towards the timing of resolution of uncertainty.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128083672","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Behavioral Theory of the Firm suggests that performance below aspirations triggers problemistic search that can lead to risk taking. This prediction has received empirical support from most stu...
{"title":"Problemistic Search of the Embedded Firm: The Joint Effects of Performance Feedback and Network Positions on Venture Capital Firms’ Risk Taking","authors":"Songcui Hu, Q. Gu, Jun Xia","doi":"10.2139/ssrn.3888515","DOIUrl":"https://doi.org/10.2139/ssrn.3888515","url":null,"abstract":"The Behavioral Theory of the Firm suggests that performance below aspirations triggers problemistic search that can lead to risk taking. This prediction has received empirical support from most stu...","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"40 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125961409","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Vimal Balasubramaniam, Tarun Ramadorai, J. Campbell, Benjamin Ranish
We build a cross-sectional factor model for investors' direct stockholdings, by analogy with standard time-series factor models for stock returns. We estimate the model using data from almost 10 million retail accounts in the Indian stock market. We find that stock characteristics such as firm age and share price have strong investor clienteles associated with them. Similarly, account attributes such as account age, account size, and extreme underdiversification (holding a single stock) are associated with particular characteristic preferences. Coheld stocks tend to have higher return covariance, suggestive of the importance of clientele effects in the stock market.
{"title":"Who Owns What? A Factor Model for Direct Stockholding","authors":"Vimal Balasubramaniam, Tarun Ramadorai, J. Campbell, Benjamin Ranish","doi":"10.2139/ssrn.3795521","DOIUrl":"https://doi.org/10.2139/ssrn.3795521","url":null,"abstract":"We build a cross-sectional factor model for investors' direct stockholdings, by analogy with standard time-series factor models for stock returns. We estimate the model using data from almost 10 million retail accounts in the Indian stock market. We find that stock characteristics such as firm age and share price have strong investor clienteles associated with them. Similarly, account attributes such as account age, account size, and extreme underdiversification (holding a single stock) are associated with particular characteristic preferences. Coheld stocks tend to have higher return covariance, suggestive of the importance of clientele effects in the stock market.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127895628","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we examine some characterizing implications of the expected utility model with a particular focus on independence and continuity. Many well documented choice anomalies under risk (e.g., the common consequence and ratio effects) show that even weaker forms of independence can be violated by experimental subjects. We demonstrate that these violations have a close relation when continuity holds, but their connection becomes less pronounced when continuity is dropped. We show that while retaining the independence axiom, replacing continuity with two intuitive conditions, substitution and monotonicity, can characterize the expected utility model. In this case, weakening the independence axiom can still yield an expected utility, but in a weaker sense implying that our axiomatization is tight.
{"title":"Expected Utility, Independence, and Continuity","authors":"Kemal Ozbek","doi":"10.2139/ssrn.3870661","DOIUrl":"https://doi.org/10.2139/ssrn.3870661","url":null,"abstract":"In this paper, we examine some characterizing implications of the expected utility model with a particular focus on independence and continuity. Many well documented choice anomalies under risk (e.g., the common consequence and ratio effects) show that even weaker forms of independence can be violated by experimental subjects. We demonstrate that these violations have a close relation when continuity holds, but their connection becomes less pronounced when continuity is dropped. We show that while retaining the independence axiom, replacing continuity with two intuitive conditions, substitution and monotonicity, can characterize the expected utility model. In this case, weakening the independence axiom can still yield an expected utility, but in a weaker sense implying that our axiomatization is tight.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121182751","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We model a decision maker who can exert costly effort to adapt her risk assessments, thereby optimizing the value of her risky prospects. We provide an axiomatic characterization of the model, and show how costs of adaption can be elicited and compared across individuals. In a moral hazard problem we show that adaption of risk assessments can weaken the effect of monetary incentives for effort provision, which have important implications for agency problems. We also provide several examples to illustrate how adaption of risk assessments can rationalize many well-known choice anomalies (e.g., the common consequence, certainty, or magnitude effects). These behavioral implications follow from a key feature of the model that adaption decisions can respond to changes in incentives.
{"title":"Preferences with Adaptive Risk Assessments","authors":"Kemal Ozbek","doi":"10.2139/ssrn.3877490","DOIUrl":"https://doi.org/10.2139/ssrn.3877490","url":null,"abstract":"We model a decision maker who can exert costly effort to adapt her risk assessments, thereby optimizing the value of her risky prospects. We provide an axiomatic characterization of the model, and show how costs of adaption can be elicited and compared across individuals. In a moral hazard problem we show that adaption of risk assessments can weaken the effect of monetary incentives for effort provision, which have important implications for agency problems. We also provide several examples to illustrate how adaption of risk assessments can rationalize many well-known choice anomalies (e.g., the common consequence, certainty, or magnitude effects). These behavioral implications follow from a key feature of the model that adaption decisions can respond to changes in incentives.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"190 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132453619","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We quantify how bargaining power is distributed when spouses make financial decisions together. We build a model in which each spouse has a risk preference and must bargain with each other to make asset decisions for the household. By structurally estimating the model with longitudinal data from Australian households, we show that the average household’s asset allocation reflects the husband’s risk preference 44% more than the wife’s. This gap in bargaining power is partially explained by gender differences in income and employment status, but is also due to gender effects. We provide further evidence that links the distribution of bargaining power to views on gender norms in the cross-section.
{"title":"The Gender Gap in Household Bargaining Power: A Portfolio-Choice Approach","authors":"R. Gu, Cameron Peng, Weilong Zhang","doi":"10.2139/ssrn.3814200","DOIUrl":"https://doi.org/10.2139/ssrn.3814200","url":null,"abstract":"We quantify how bargaining power is distributed when spouses make financial decisions together. We build a model in which each spouse has a risk preference and must bargain with each other to make asset decisions for the household. By structurally estimating the model with longitudinal data from Australian households, we show that the average household’s asset allocation reflects the husband’s risk preference 44% more than the wife’s. This gap in bargaining power is partially explained by gender differences in income and employment status, but is also due to gender effects. We provide further evidence that links the distribution of bargaining power to views on gender norms in the cross-section.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124660877","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Tao Chen, Shinichi Kamiya, Pingyi Lou, Andreas Milidonis
We test for the causal impact of analyst coverage on corporate risk-taking in the property and casualty insurance sector, using the exogenous change in analyst coverage introduced by broker closures and mergers. We find that a decrease in analyst coverage promotes an increase in insurers’ risk-taking, which is mainly driven by insurers with smaller initial analyst coverage and those operating in an environment of lower product market competition. We also show that the decrease in analyst coverage causes more risky investment behaviors, more risky underwriting, and less conservative reserving practice.
{"title":"Analyst Coverage and Corporate Risk-Taking: Evidence From Property-Casualty Insurance Firms","authors":"Tao Chen, Shinichi Kamiya, Pingyi Lou, Andreas Milidonis","doi":"10.2139/ssrn.3778633","DOIUrl":"https://doi.org/10.2139/ssrn.3778633","url":null,"abstract":"We test for the causal impact of analyst coverage on corporate risk-taking in the property and casualty insurance sector, using the exogenous change in analyst coverage introduced by broker closures and mergers. We find that a decrease in analyst coverage promotes an increase in insurers’ risk-taking, which is mainly driven by insurers with smaller initial analyst coverage and those operating in an environment of lower product market competition. We also show that the decrease in analyst coverage causes more risky investment behaviors, more risky underwriting, and less conservative reserving practice.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"54 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122010444","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We consider mechanism design problems with Knightian uncertainty formalized using incomplete preferences, as in Bewley (1986). Without completeness, decision making depends on a set of beliefs, and an action is preferred to another if and only if it has larger expected utility for all beliefs in this set. We consider two natural notions of incentive compatibility in this setting: maximal incentive compatibility requires that no strategy has larger expected utility than reporting truthfully for all beliefs, while optimal incentive compatibility requires that reporting truthfully has larger expected utility than all other strategies for all beliefs. In a model with a continuum of types, we show that optimal incentive compatibility is equivalent to ex-post incentive compatibility under fairly general conditions on beliefs. In a model with a discrete type space, we characterize full extraction of rents generated from private information. We show that full extraction is generically possible with maximal incentive compatible mechanisms, but requires sufficient disagreement across types, which neither holds nor fails generically, with optimal incentive compatible mechanisms.
{"title":"Uncertainty in Mechanism Design","authors":"Giuseppe Lopomo, Luca Rigotti, Chris Shannon","doi":"10.2139/ssrn.3774581","DOIUrl":"https://doi.org/10.2139/ssrn.3774581","url":null,"abstract":"We consider mechanism design problems with Knightian uncertainty formalized using incomplete preferences, as in Bewley (1986). Without completeness, decision making depends on a set of beliefs, and an action is preferred to another if and only if it has larger expected utility for all beliefs in this set. We consider two natural notions of incentive compatibility in this setting: maximal incentive compatibility requires that no strategy has larger expected utility than reporting truthfully for all beliefs, while optimal incentive compatibility requires that reporting truthfully has larger expected utility than all other strategies for all beliefs. In a model with a continuum of types, we show that optimal incentive compatibility is equivalent to ex-post incentive compatibility under fairly general conditions on beliefs. In a model with a discrete type space, we characterize full extraction of rents generated from private information. We show that full extraction is generically possible with maximal incentive compatible mechanisms, but requires sufficient disagreement across types, which neither holds nor fails generically, with optimal incentive compatible mechanisms.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"40 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122459186","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study incentive contracts in asset management business under dynamic actions and relationships between an investor, a partner of an investment company, and a fund manager of the company. The investor cannot perfectly observe the partner and manager’s actions, and similarly, the partner cannot perfectly observe the manager’s actions. We show how the actions of the participants and the costs of their actions interact. For instance, the optimal effort of the manager falls in the partner’s fundraising cost. We extend the model to a case with an investor, a partner, and multiple managers. In this case, each manager’s effort rises in the effectiveness of the managers’ cooperation and falls in their other managers’ effort cost.
{"title":"Dynamic Contracting in Asset Management under Investor-Partner-Manager Relationship","authors":"J. Keppo, N. Touzi, Zuo Ruiting","doi":"10.2139/ssrn.3761499","DOIUrl":"https://doi.org/10.2139/ssrn.3761499","url":null,"abstract":"We study incentive contracts in asset management business under dynamic actions and relationships between an investor, a partner of an investment company, and a fund manager of the company. The investor cannot perfectly observe the partner and manager’s actions, and similarly, the partner cannot perfectly observe the manager’s actions. We show how the actions of the participants and the costs of their actions interact. For instance, the optimal effort of the manager falls in the partner’s fundraising cost. We extend the model to a case with an investor, a partner, and multiple managers. In this case, each manager’s effort rises in the effectiveness of the managers’ cooperation and falls in their other managers’ effort cost.","PeriodicalId":281936,"journal":{"name":"ERN: Other Microeconomics: Decision-Making under Risk & Uncertainty (Topic)","volume":"150 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117309354","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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