CER-ETH Research Seminar, Spring Term 2015

Speakers

Horst Zank

This paper proposes an ambiguity model that accounts for Ellsberg-and-Allais type behavior in the famous Anscombe and Aumann framework. Ambiguity attitudes are captured through both utility (as in recursive expected utility) and non-additive probabilities (as in Choquet expected utility), hence, combining `smooth' and `kinked' approaches to ambiguity. The model is based on a single preference principle called substitution consistency. Due to a natural embedding of backward induction, substitution consistency allows for one-stroke representations of preferences including Schmeidler's Choquet expected utility, recursive expected utility and subjective expected utility as particular cases, without referring to mixtures of lotteries. In addition to the provision of a unified setup in which different ambiguity models can jointly be analyzed and compared, substitution consistency simplifies the formal study of relative concavity of utility for risk and ambiguity without committing to recursive expected utility. We also show how our general recursive model can facilitate the descriptive study of ambiguity attitudes.

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Mathias Kifmann

This study investigates hospitals’ dynamic incentives to select patients when hospitals are remunerated according to a prospective payment system of the DRG type. Given that prices typically reflect past average costs, we use a discrete-time dynamic framework. Patients differ in severity within a DRG. Providers are to some extent altruistic. For low altruism, a downward spiral of prices is possible which induces hospitals to focus on low-severity cases. For high altruism, dynamic price adjustment depends on relation between patients’ severity and benefit. In a steady state, DRG prices are unlikely to give optimal incentives to treat patients.
models can jointly be analyzed and compared, substitution consistency simplifies the formal study of relative concavity of utility for risk and ambiguity without committing to recursive expected utility. We also show how our general recursive model can facilitate the descriptive study of ambiguity attitudes.

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Carlolyn Fischer

WTO agreements discipline the use of subsidies, particularly for upstream manufacturing or exports. Unlike tariff rules, the Subsidies Code lacks exceptions for transboundary externalities like human health or resource conservation, including those related to combatting global climate change. Yet support policies for green goods like renewable energy are much more popular internationally than imposing a cost on carbon. Many interventions support downstream deployment of renewable energy technologies; others subsidize upstream development and manufacturing of those technologies. The strategic trade literature has devoted little attention to the range of market failures related to green goods. We consider the market for a new environmental good (e.g., an alternative renewable energy technology) that when consumed downstream may provide external benefits (like reduced emissions). The technology is traded internationally, but provided by a limited set of upstream suppliers that may operate in imperfect markets, such as with market power or external scale economies. We examine the national incentives and global rationales for offering production and consumption subsidies in producer countries, allowing that some of the downstream market may lie in third-party countries. We supplement the analysis with numerical simulations of optimal subsidies for the major renewable energy producing and consuming regions.

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Martin Kocher

An extensive literature has studied ambiguity aversion in economic decision making, and how ambiguity aversion can account for empirically observed violations of expected utility-based theories. Almost all relevant applied models presume a general dislike of ambiguity. In this paper, we provide a systematic experimental assessment of ambiguity attitudes in different likelihood ranges and in the gain domain, the loss domain and with mixed outcomes. We draw on a unified framework with more than 500 participants and find that ambiguity aversion is the exception, not the rule. We replicate the usual finding of ambiguity aversion for moderate likelihood gains. However, when introducing losses or lower likelihoods, we observe either ambiguity neutrality or even ambiguity seeking behavior. Our results are robust to different elicitation procedures.

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Matthias Polborn

We develop a theory of electoral competition predicated upon the notion that voters care both about their local candidates’ positions, and the positions of their parties, and that those party positions are in turn determined by the positions of the parties’ elected representatives in the legislature. We show that candidates may be unable to escape the burden of their party association, and that the primary voters in both parties exploit the median voters’ national preferences to nominate the most extreme electable candidates. Gerrymandering affects the equilibrium platforms also in those districts whose ideology remains constant.

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Jeroen van den Berg

To be announced

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