Higher Marginal Utility Research Articles

Risk-adjusted performance of new economy indices and thematic sectors

We analyze the performance and risk factor exposures of 10 thematic sectors and the associated market-wide indices directly related to highly innovative industries driving the fourth and fifth industrial revolutions. Formal statistical analysis shows that we cannot reject that alphas are jointly zero for alternative combinations of 12 recognized risk factors. When we analyze the exposure of these indices and sectors to risk factors, we find that they are generally small and weakly profitable. Moreover, these thematic sectors react badly to adverse shocks in the expected market risk premium suggesting an increasing risk of these sectors during high marginal utility events. The Future Communication sector is a notable exception to the joint zero-alpha performance. Despite the small possibility of very high returns in the future if their innovation becomes successful, it seems advisable to use these sectors by combining them with either industrial sectors or smart beta portfolios.

Marine Sites and the Drivers of Wellbeing: Ecosystem vs. Anthropic Services

Coastal sites offer a range of services that contribute to human wellbeing. While some of the services are entirely human-made (e.g., parasol and sunbed rental), others are produced thanks to the contribution of marine ecosystems (e.g., water clarity). The purpose of this paper is to investigate the preferences of a sample of beachgoers for these two categories of services that policymakers have to balance when designing management strategies for coastal sites. We consider a marine site in the north of Italy that partially falls within the boundaries of a protected area but that is characterized by a medium-to-high level of anthropization. The results of a discrete choice experiment show that in the current state of things, the ecosystem services proposed for the sample have, on average, a higher marginal utility, suggesting that actions increasing those services have a larger effect on well-being.

Providers preferences towards greater patient health benefit is associated with higher quality of care.

Standard theories of health provider behavior suggest that providers are motivated by both profit and an altruistic interest in patient health benefit. Detailed empirical data are seldom available to measure relative preferences between profit and patient health outcomes. Furthermore, it is difficult to empirically assess how these relative preferences affect quality of care. This study uses a unique dataset from rural Myanmar to assess heterogeneous preferences toward treatment efficacy relative to provider profit and the impact of these preferences on the quality of provider diagnosis and treatment. Using conjoint survey data from 187 providers, we estimated the marginal utilities of higher treatment efficacy and of higher profit, and the marginal rate of substitution between these outcomes. We also measured the quality of diagnosis and treatment for malaria among these providers using a previously validated observed patient simulation. There is substantial heterogeneity in providers' utility from treatment efficacy versus utility from higher profits. Higher marginal utility from treatment efficacy is positively associated with the quality of treatment among providers, and higher marginal utility from profit are negatively associated with quality of diagnosis. We found no consistent effect of the ratio of marginal utility of efficacy vs marginal utility of profit on quality of care. Our findings suggest that providers vary in their preferences towards profit and treatment efficacy, with those providers that place greater weight on treatment efficacy providing higher quality of care.

Nonlinear Pricing with Average-Price Bias

Empirical evidence suggests that consumers facing complex nonlinear prices often make choices based on average (not marginal) prices. Given such behavior, we characterize a monopolist’s optimal nonlinear price schedule. In contrast to the textbook setting, nonlinear prices designed for “ average-price bias” distort consumption downward for consumers with the highest marginal utility and typically feature quantity premia rather than quantity discounts. These properties arise because the bias replaces consumer information rents with “curvature rents.” Whether or not a monopolist prefers consumers with average-price bias depends upon underlying preferences and costs. (JEL D11, D21, D42, L12)

Why do discount rates vary?

The price of discount rate risk reveals whether increases in equity risk premia represent good or bad news to rational investors. Employing a new empirical methodology, we find that the price is negative, which suggests that discount rates are high during times of high marginal utility of wealth. Our approach relies on using future realized market returns to consistently estimate covariances of asset returns with the market risk premium. Covariances drive observed patterns in a broad cross section of stock and bond expected returns.

Optimal Monetary Policy with Heterogeneous Agents

We analyze optimal monetary policy under commitment in an economy with uninsurable idiosyncratic risk, long-term nominal bonds and costly inflation. Our model features two transmission channels of monetary policy: a Fisher channel, arising from the impact of inflation on the initial price of long-term bonds, and a liquidity channel. The Fisher channel gives the central bank a reason to inflate for redistributive purposes, because debtors have a higher marginal utility than creditors. This inflationary motive fades over time as bonds mature and the central bank pursues a deflationary path to raise bond prices and thus relax borrowing limits. The result is optimal inflation front-loading. Numerically, we find that optimal policy achieves first-order consumption and welfare redistribution vis-a-vis a zero inflation policy.

Are Consumers’ Egg Preferences Influenced by Animal-Welfare Conditions and Environmental Impacts?

We conducted a labelled discrete choice experiment (DCE) to assess consumers’ preferences and willingness to pay (WTP) for fresh hens’ eggs produced via different production systems (caged, barn, free range, or organic). We estimated purchase intentions and WTP for different possible reductions (0%, 10%, 20%, and 30%) of greenhouse gas (GHG) emissions and water use in the egg production systems. Data were collected using an online open-ended questionnaire completed by a representative sample of 1045 Spanish egg consumers. The results of a random parameter logit (RPL) model showed heterogeneous preferences for different types of eggs with higher marginal utility and WTP for a production system ensuring higher animal welfare level, such as free-range eggs. However, consumers showed a lower preference for organic eggs at the actual market prices since they were unwilling to pay for this category of eggs. Moreover, there were positive marginal WTPs for reductions in GHG emissions and water use, but only for significant reductions (20% or 30%) with respect to the current situation. Potential buyers for free-range eggs were identified to be persons under 40 years old, persons with a monthly income of more than €1500, and persons who were pro-environment. Our findings provide producers, sellers and policy makers with useful information that may guide them in the development of successful communication and pricing strategies.

Mutual Fund Performance When It Really Matters Most

Motivated by asset pricing evidence that disappointment periods in aggregate consumption growth are very good proxies for high marginal utility states, we examine whether equity fund performance exhibits state dependence. We find that the quintile of funds with the highest (lowest) unconditional CAPM alpha exhibits the biggest decrease (increase) in risk-adjusted performance during disappointment months. As a result, the alpha differential between unconditional winner and loser funds disappears when it matters most in utility terms. Our results indicate that the unconditional CAPM alpha is a highly misspecified performance measure from the viewpoint of a disappointment averse investor. To the contrary, state dependence is considerably attenuated when the 3-factor Fama-French alpha is used as performance measure. We conclude that the latter is the least misspecified unconditional performance measure, as it better aligns managerial incentives with the preferences of a disappointment averse investor. These findings are particularly important for fund performance measurement in light of the recent evidence that investors primarily evaluate funds on the basis of their CAPM alpha.

External Equity Financing Shocks, Financial Flows, and Asset Prices

AbstractWe develop a dynamic model with time variation in external equity financing costs and show that variation in these costs is important for the model to quantitatively capture the joint dynamics of firms’ asset prices, real quantities, and financial flows in the U.S. economy. Growth firms and high investment firms are less risky in equilibrium, because they can substitute more easily debt financing for equity financing when it becomes more costly to raise external equity, which are high marginal utility states. Using a model-implied proxy of aggregate equity issuance cost shocks, we provide empirical support for the model’s economic mechanism.Received August 7, 2017; editorial decision September 24, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Discussion

Discussion

Flexible Biogas in Future Energy Systems—Sleeping Beauty for a Cheaper Power Generation

The increasing proportion of intermittent renewable energies asks for further technologies for balancing demand and supply in the energy system. In contrast to other countries, Germany is characterized by a high installed capacity of dispatchable biogas plants. For this paper, we analyzed the total system costs varying biogas extension paths and modes of operation for the period of 2016–2035 by using a non-linear optimization model. We took variable costs of existing conventional power plants, as well as variable costs and capital investments in gas turbines, Li-ion batteries, and pumped-storage plants into account. Without the consideration of the costs for biogas plants, an increasing proportion of biogas plants, compared to their phase out, reduces the total system costs. Furthermore, their flexible power generation should be as flexible as possible. The lowest total system costs were calculated in an extension path with the highest rate of construction of new biogas plants. However, the highest marginal utility was assessed by a medium proportion of flexible biogas plants. In conclusion, biogas plants can be a cost-effective option to integrate intermittent renewable energies into the electricity system. The optimal extension path of biogas plants depends on the future installed capacities of conventional and renewable energies.

Motivation and Competition in Health Care

Non-pecuniary sources of motivation are a strong feature of the health care sector and the impact of competitive incentives may be lower where pecuniary motivation is low. We test this hypothesis by measuring the marginal utility of income of physicians from a stated-choice experiment, and examining whether this measure influences the response of physicians to changes in competition on prices charged. We find that physicians exploit a lack of competition with higher prices only if they have a high marginal utility of income.

A tale of two option markets: Pricing kernels and volatility risk

Using both S&P 500 option and recently introduced VIX option prices, we study pricing kernels and their dependence on multiple volatility factors. We first propose nonparametric estimates of marginal pricing kernels, conditional on the VIX and the slope of the variance swap term structure. Our estimates highlight the state-dependence nature of the pricing kernels. In particular, conditioning on volatility factors, the pricing kernel of market returns exhibit a downward sloping shape up to the extreme end of the right tail. Moreover, the volatility pricing kernel features a striking U-shape, implying that investors have high marginal utility in both high and low volatility states. This finding on the volatility pricing kernel presents a new empirical challenge to both existing equilibrium and reduced-form asset pricing models of volatility risk. Finally, using a full-fledged parametric model, we recover the joint pricing kernel, which is not otherwise identifiable.

On the Distributive Effects of Inflation

This paper undertakes a quantitative investigation of the effects of anticipated inflation on the distribution of household wealth and welfare. Consumer Finance Data on household financial wealth suggests that about a third of the US population holds all its financial assets in transaction accounts. The remaining two-third of the US population holds most of their financial assets outside transaction accounts. To account for this evidence, I introduce a portfolio choice in a standard incomplete markets model with heterogeneous agents. I calibrate the model economy to SCF 2010 US data and use this environment to study the distributive effects of changes in anticipated inflation. An increase in anticipated inflation leads households to reshuffle their portfolio towards real assets. This crowding-in of supply for real assets lowers equilibrium interest rates and thereby redistributes wealth from creditors to borrowers. Because borrowers have a higher marginal utility, this redistribution improves aggregate welfare. First, this paper shows that inflation acts not only a regressive consumption tax as in Erosa and Ventura (2002), but also as a progressive tax. Second, this paper shows that the welfare cost of inflation are even lower than the estimates computed by Lucas (2000) and Ireland (2009). Finally, this paper offers insights into why deflationary environments should be avoided.

Bet You Can't Eat Just One: Hot and Cold Selves and 'Self'-Control

This paper considers an intrapersonal game between a moderate cold self and a hot self with a higher marginal utility of consumption. Indulging in a tempting good -- eating the first chocolate from a bowl, for example -- induces the hot self and makes further consumption more likely. In equilibrium, sophisticated selves best respond to each other's behaviour by adopting personal rules to avoid inducing the other self: the cold self over-abstains and the hot self over-indulges, explaining cycles of abstinence and binging such as ‘falls off the wagon' that are sometimes observed as well as the strictness of some consumers' personal rules. Multiple equilibria may exist, making expectations about the behaviour of the other self important. A brief lab experiment tests the prediction that indulgence increases the appeal of further consumption, finding that consumers on a diet who eat a piece of chocolate before the experiment consume more during it.

A Tale of Two Option Markets: Pricing Kernels and Volatility Risk

Using prices of both S&P 500 options and recently introduced VIX options, we study asset pricing implications of volatility risk. While pointing out the joint pricing kernel is not identified nonparametrically, we propose model-free estimates of marginal pricing kernels of the market return and volatility conditional on the VIX. We find that the pricing kernel of market return exhibits a decreasing pattern given either a high or low VIX level, whereas the unconditional estimates present a U-shape. Hence, stochastic volatility is the key state variable responsible for the U-shape puzzle documented in the literature. Finally, our estimates of the volatility pricing kernel feature a U-shape, implying that investors have high marginal utility in both high and low volatility states.

The economics of options-implied inflation probability density functions

Recently a market in options based on consumer price index inflation (inflation caps and floors) has emerged in the US. This paper uses quotes on these derivatives to construct probability densities for inflation. We study how these probability density functions respond to news announcements and find that the implied odds of deflation are sensitive to certain macroeconomic news releases. We also estimate empirical pricing kernels using these option prices along with time series models fitted to inflation. The options-implied densities assign considerably more mass to extreme inflation outcomes (either deflation or high inflation) than do their time series counterparts. This yields a U-shaped empirical pricing kernel, with investors having high marginal utility in states of the world characterized by either deflation or high inflation.

DISABILITY AND MARGINAL UTILITY OF INCOME: EVIDENCE FROM HYPOTHETICAL CHOICES

It is often assumed that disability reduces the marginal utility of income. In this article, individuals' marginal utility of income in two states-(i) paralyzed in both legs from birth and (ii) not mobility impaired at all-is measured through hypothetical choices between imagined lotteries behind a so-called veil of ignorance. The outcomes of the lotteries include both income and disability status. It is found that most people have higher marginal utility when paralyzed than when not mobility impaired at all. The two marginal utilities are evaluated at the same levels of income. Having personal experience of mobility impairment and supporting the Left Party, the Social Democratic Party, the Green Party, or the Liberal Party are associated with having a higher marginal utility when paralyzed. The results suggest that more than full insurance of income losses connected to being disabled is optimal. The results further suggest that, given a utilitarian social welfare function, resources should be transferred to rather than from disabled people. Finally, if the transfers are not large enough to smooth out the marginal utilities of the disabled and the nondisabled, distributional weights based on disability status should be used in cost-benefit analysis.

Using a Choice Design to Screen Nutraceutical‐Rich Juices

AbstractAvailability of functional foods containing nutraceutical compounds has increased because of growing demands for health‐oriented products. Choice surveys, which present hypothetical choice sets to participants, can be used to assess the market potential for products like nutraceutical‐rich juices. An online choice survey (n = 1,035) was used to identify a preferred juice blend and factors that influenced choice for juice blends of açaí, black cherry, blueberry, Concord grape, cranberry and/or pomegranate juice. Participants were given potential health‐oriented information (ranking of antioxidant composites) during the survey. Participants indicated perceived overall liking of individual juices and answered attitudinal statements for time preference and antioxidant information. Concord grape juice was the most liked, followed by cranberry, pomegranate, black cherry, blueberry and açaí. Liking of juice was positively correlated to presence of Concord grape and cranberry juice. Unfamiliarity of juices was negatively correlated to liking of juices. Analysis indicated that black cherry, Concord grape and pomegranate juice blend had the highest marginal utility as well as high overall liking and high antioxidant levels. Choice surveys can be used as screening designs for product development to determine the ingredients that drive consumer choices for nutraceutical‐rich products.Practical ApplicationsScreening designs are necessary to maximize research resource potential and to select the most suitable products for further development. Screening designs can be used for other products to facilitate the selection of the best profiles.

Life Insurance and Household Consumption

Using life insurance holdings by age, sex, and marital status, we infer how individuals value consumption in different demographic stages. We estimate equivalence scales and bequest motives simultaneously within a fully specified model where agents face US demographics and save and purchase life insurance. Our findings indicate that individuals are very caring for dependents, that economies of scale are large, that children are very costly (or yield very high marginal utility), that wives with children produce lots of home goods, and that females display habits from marriage, while men do not. These findings contrast sharply with standard equivalence scales.