Dynamic Utility Maximization Research Articles

Rational regulation of water-seeking effort in rodents

In the laboratory, animals' motivation to work tends to be positively correlated with reward magnitude. But in nature, rewards earned by work are essential to survival (e.g., working to find water), and the payoff of that work can vary on long timescales (e.g., seasonally). Under these constraints, the strategy of working less when rewards are small could be fatal. We found that instead, rats in a closed economy did more work for water rewards when the rewards were stably smaller, a phenomenon also observed in human labor supply curves. Like human consumers, rats showed elasticity of demand, consuming far more water per day when its price in effort was lower. The neural mechanisms underlying such "rational" market behaviors remain largely unexplored. We propose a dynamic utility maximization model that can account for the dependence of rat labor supply (trials/day) on the wage rate (milliliter/trial) and also predict the temporal dynamics of when rats work. Based on data from mice, we hypothesize that glutamatergic neurons in the subfornical organ in lamina terminalis continuously compute the instantaneous marginal utility of voluntary work for water reward and causally determine the amount and timing of work.

Keynes and Samuelson Combined Provided the Complete Foundation for a Science of Macroeconomics: Complexity Modeling Is Welcome, But Not Necessary, for a Scientific Foundation for Macroeconomics

Keynes and Samuelson provided the theoretical, technical and mathematical modeling necessary in order to provide a complete scientific foundation for macroeconomic theory. Keynes’s Aggregate Supply Curve (ASC),presented initially on pp. 55-56 in footnote 2 of the General Theory and in great detail in chapter 20, provided the foundations for incorporating multiple equilibria and degrees of uncertainty, based on his analysis of interval valued probability and weight of the evidence from the A Treatise on Probability, into macroeconomic analysis. Keynes’s 1938-39 work on Harrod’s draft copy of dynamic, intertemporal, economic growth, based on multiplier-accelerator interactions, which generated positive feedback impacts, combined with Samuelson’s work on the interaction of the multiplier and accelerator in 1939 and in his dissertation, showed that microeconomic optimization techniques, based on negative feedback, can’t incorporate interactive feedback impacts. They are inapplicable at a macro level dealing with multiple equilibria. Only the stability properties of the multiple equilibria can be examined. It is impossible to determine whether the many, possible, different equilibriums are optimal in the sense of being full employment equilibriums or unemployment equilibriums. Unfortunately, the current dominant approach to macroeconomics, with its claims of constant, inter-temporal, dynamic utility and profit maximization over all times with known subjective probability distributions, is, as Savage stated, “utterly ridiculous”, as well as being “preposterous”. The Lucas-Real Business cycle model approach to macroeconomics with a single representative agent needs to be replaced as soon as possible by the combined work of J M Keynes and Paul Samuelson that was done in the late 1930’s.

The scientific foundation of dynamic stochastic general equilibrium (DSGE) models

DSGE-models provide a coherent framework of analysis. This coherence is brought about by restricting acceptable behavior of agents to dynamic utility maximization and rational expectations. The problem of the DSGE-models (and more generally of macroeconomic models based on rational expectations) is that they assume extraordinary cognitive capabilities of individual agents. In addition, these models need a lot of ad-hoc assumptions to make them fit the data. I argue that we need models that take into account the limited cognitive abilities of agents. One can introduce rationality in such models by assuming “trial and error“ learning. I propose such a model and I analyze its implications.

Risk aversion and the elasticity of substitution in general dynamic portfolio theory: Consistent planning by forward looking, expected utility maximizing investors

Using the measure of risk aversion suggested by Kihlstrom and Mirman [Kihlstrom, R., Mirman, L., 1974. Risk aversion with many commodities. Journal of Economic Theory 8, 361–388; Kihlstrom, R., Mirman, L., 1981. Constant, increasing and decreasing risk aversion with many commodities. Review of Economic Studies 48, 271–280], we propose a dynamic consumption-savings–portfolio choice model in which the consumer-investor maximizes the expected value of a non-additively separable utility function of current and future consumption. Preferences for consumption streams are CES and the elasticity of substitution can be chosen independently of the risk aversion measure. The additively separable case is a special case. Because choices are not dynamically consistent, we follow the “consistent planning” approach of Strotz [Strotz, R., 1956. Myopia and inconsistency in dynamic utility maximization. Review of Economic Studies 23, 165–180] and also interpret our analysis from the game theoretic perspective taken by Peleg and Yaari [Peleg, B., Yaari, M., 1973. On the existence of a consistent course of action when tastes are changing. Review of Economic Studies 40, 391–401]. The equilibrium of the Lucas asset pricing model with i.i.d. consumption growth is obtained and the equity premium is shown to depend on the elasticity of substitution as well as the risk aversion measure. The nature of the dependence is examined. Our results are contrasted with those of the non-expected utility recursive approach of Epstein–Zin and Weil.

Brand Inertia in U.S. Household Cheese Consumption

AbstractTo analyze U.S. consumers' brand choices for cheese purchases, we derive a set of discrete‐choice models from dynamic utility maximization. ACNielsen Homescan Survey data on U.S. households is used to estimate a dynamic probit model for each of the top brands for cheddar, shredded, and sliced cheese in four U.S. regions. We find that households have strong brand inertia, a result robust across alternative specifications. Predicted probabilities confirm greater inertia in the top brands and consumers are more likely to switch into them. Brand inertia is relatively larger in cheddar and sliced cheese especially in the Central and Southeast regions.

Life cycle employment and fertility across institutional environments

In this paper, we formulate a dynamic utility maximization model of female labor force participation and fertility choices and estimate approximate decision rules using data on married women in Italy, Spain and France. The estimated decision rules indicate that first-order state dependence is the most important factor determining female labor supply behavior in all three countries. We also find that cross-country differences in state dependence effects are consistent with the order of country-level measures of labor market flexibility and child care availability. Counterfactual simulations of the model indicate that female employment rates in Italy and Spain could reach EU target levels were French social policies to be adopted in those countries.

Option pricing under threshold autoregressive models by threshold Esscher transform

This paper develops a valuation model for options under the class of self-exciting threshold autoregressive (SETAR) models and their variants for the price dynamics of the underlying asset using the self-exciting threshold autoregressive Esscher transform (SETARET). In particular, we focus on the first generation SETAR models first proposed by Tong (1977, 1978) and later developed in Tong (1980, 1983) and Tong and Lim (1980), and the second generation models, including the SETAR-GARCH model proposed in Tong (1990) and the double-threshold autoregressive heteroskedastic time series model (DTARCH) proposed by Li and Li (1996). The class of SETAR-GARCH models has the advantage of modelling the non-linearity of the conditional first moment and the varying conditional second moment of the financial time series. We adopt the SETARET to identify an equivalent martingale measure for option valuation in the incomplete market described by the discrete-time SETAR models. We are able to justify our choice of probability measure by the SETARET by considering the self-exciting threshold dynamic utility maximization. Simulation studies will be conducted to investigate the impacts of the threshold effect in the conditional mean described by the first generation model and that in the conditional variance described by the second generation model on the qualitative behaviors of the option prices as the strike price varies.

Life Cycle Employment and Fertility Across Institutional Environments

In this paper, we formulate a dynamic utility maximization model of female labor force participation and fertility choices and estimate approximate decision rules using data on married women in Italy, Spain and France. The pattern of estimated state dependence effects across countries is consistent with aggregate patterns in part-time employment and child care availability, suggesting that labor market rigidities and lack of child care options are important sources of state dependence. Simulations of the model reveal that Italian and Spanish women would substantially increase their participation rates were they to face the French institutional environment.

Dynamic utility maximization with bounded shortfall risks

AbstractWe address the dynamic portfolio optimization problem where the expected utility from terminal wealth has to be maximized. The special feature of this paper is an additional constraint on the portfolio strategy modeling bounded shortfall risks. We consider the risk, that the terminal wealth of the portfolio falls short of a certain benchmark. This benchmark is chosen to be proportional to the stock price. The risk is measured by the Expected Utility Loss.Using a continuous‐time model of a complete financial market and applying martingale methods, analytic expressions for the optimal terminal wealth and the optimal portfolio strategies are given. (© 2005 WILEY‐VCH Verlag GmbH & Co. KGaA, Weinheim)

A Dynamic Utility Maximization Model for Product Category Consumption

textabstractIt is conceivable that the whether to buy and how much to buy decisions in the purchasing process of households are influenced by the inventory process. In this paper we therefore put forward a model for consumption, where we rely on established economic theory. We incorporate this model in a model for purchase behavior. Our consumption specification, which is derived from utility maximization principles, is more flexible than an ad hoc approach, which has recently been proposed in the literature. We illustrate our model for yogurt purchases, and show that our model yields important additional and useful insights. One such insight is that promotion anticipation behavior turns out not only to occur in the purchasing process, but also in the consumption process.

Tenure choice and the riskiness of non-housing consumption

This paper analyzes a household's choice of housing tenure within a dynamic utility maximization model that yields simple analytical results under uncertainty of income, housing prices, and rents. Given a housing consumption plan, we show that a decrease in the covariance between a household's earnings and housing rents increases the likelihood of ownership. A household who plans to remain in its home over a long period is more likely to own; a household who plans to remain in its home over a short period is more likely to rent. The higher the covariance between the user cost of a home and that of other properties a household is likely to consider in the future, the more likely the household is to own this home. These predictions of our model find support in recent empirical studies.

Panel data analysis of household brand choices

The paper examines theoretical and empirical issues arising in panel data studies of household brand choices. We develop a dynamic utility maximization model with habit formation that yields a discrete choice model that is linear in a vector of observable individual and brand characteristics, the lagged choice, an unobservable permanent individual/brand-specific effect, and an unobservable time-varying error component. We estimate the model using panel data on household yogurt purchases. We compare traditional estimation procedures with the method recently proposed by Honoré and Kyriazidou. Panel data discrete choice models with lagged dependent variables, Econometrica 68 839–874. The methods’ robustness with respect to underlying assumptions is investigated in Monte Carlo simulations.

Time-consistent optimal stopping

This paper investigates time-consistent vNM preferences under uncertainty where the strategies are stopping times, and sooner is preferred to later. I show that in addition to Strotz's [Strotz, R., 1956. Myopia and Inconsistency in Dynamic Utility Maximization, Review of Economic Studies, 23, 165–180] exponential discounting class, negative affine discounting also yields time-consistent behavior.

Female Labour Supply and Marital Status Decisions: A Life-Cycle Model

This paper studies the interdependence between and the determinants of life-cycle marital status and labour force participation decisions of women. A dynamic utility maximization model is presented and estimated using longitudinal data on women from the Panel Study of Income Dynamics. The MLE method employed, involves solving a dynamic programming problem. Further, a minimum distance estimator is proposed which allows for the incorporation of wage data in a computationally simple way. The estimates are used to predict changes in the life-cycle patterns of employment, marriage and divorce due to differences in education, race, the female's earnings and her (potential) husband's earnings. The estimation results indicate that the utility gains to marriage are decreasing in the female's wage rate and increasing in her (potential) husband's earnings, while the opposite is found for gains to working. Ignoring the endogeneity of marital status decisions is shown to lead to an underestimation of own and husband's wage effects on female labour supply.

Econometric estimation for a model with dynamic housing tenure choice

The objective of this paper is to show a method for estimating the parameters of a dynamic utility maximization model which includes discrete choices and to take housing demands as an example. The utility maximization problem introduces here attempts to determine how households decide when to purchase housing and how they decide to allocate their resources between housing and non-housing consumption.

Myopia and Inconsistency in Dynamic Utility Maximization

Journal Article Myopia and Inconsistency in Dynamic Utility Maximization Get access R. H. Strotz R. H. Strotz Evanston, Illinois Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 23, Issue 3, 1955, Pages 165–180, https://doi.org/10.2307/2295722 Published: 01 December 1955