Marginal Rate Of Substitution Research Articles

A Model of Inequality Aversion and Private Provision of Public Goods

AbstractI develop a model of inequality aversion and public goods that allows the marginal rate of substitution to be variable. As a theoretical foundation, utility function of the standard public goods model is nested in the Fehr-Schmidt model. An individual’s contribution function for a public good is derived by solving the problem of kinky preference and examining both interior and corner solutions. Results show that the derived contribution function is not monotonic with respect to the other individual’s provision. Thus, the model can be used to explain empirical evidence for the effect of social comparison on public-good provision.

Substitutability of Freshwater and Non‐Freshwater Sources in Irrigation: an Econometric Analysis

Population growth is increasing the scarcity of freshwater for irrigation and accelerating its replacement with non‐freshwater sources such as treated wastewater and brackish water. Although these substitutes may be less productive agronomically, their supply is usually more stable. We develop a structural econometric framework to assess the substitution between fresh‐ and non‐fresh water as it is inferred from water‐use decisions of farmers under increasing block‐rate water pricing. We employ the model to village‐level panel data from Israel, in which 50% of the freshwater allotments were replaced during the 1990–2010 period by treated‐wastewater quotas, using a non‐freshwater/freshwater volumetric exchange rate of 1.2. Based on our estimation results, the hypothesis that the marginal rate of substitution between the two water sources is equal to one cannot be rejected. Simulations suggest that the Israeli quota‐exchange policy has increased both agricultural production value and farming profits.

Effect of the CITES trade ban on preferences for ivory in Japan

This paper characterizes the ivory demand in Japan, formerly, the largest consumer country of ivory, by imports of worked ivory since 1970. During the entire period, the preference parameters, each of which represents the elasticity of the marginal rate of substitution, suggest that a change occurred in 1989, when the African elephant was listed in the CITES Appendix I. We conduct hypothesis tests on the differences in consumer preferences for observation periods before and after 1989. We show that Veblen effects caused the increasing shift of the demand in the first period, meaning that ivory products were more preferred as their price increased. They were purchased even though the price continued to rise before the trade ban intervened. The Veblen effects disappeared in the second period when the demand became homogeneous of degree zero. Due to public awareness of illegal trade and endangered elephants, the quantity of the demand for worked ivory quickly declined. The price has fluctuated unpredictably since the 2000s, and a small amount of worked ivory is imported at a high price because of the unavailability of ivory products. Prohibition could influence the social preference for wildlife products from which domestic demand is formed.

Optimal hospital payment rules under rationing by waiting

We derive optimal rules for paying hospitals for non-emergency care when providers choose quality and capacity, and patient demand is rationed by waiting time. Waiting for treatment is costly for patients, so that hospital payment rules should take account of their effect on waiting time as well as on quality. Since deterministic waiting time models imply that profit maximising hospitals will never choose to have both positive quality and positive waiting time, we develop a stochastic model of rationing by waiting in which both quality and expected waiting are positive in equilibrium. We use it to show that, although a prospective output price gives hospitals an incentive to attract patients by raising quality and reducing waiting times, it must be supplemented by a price attached to hospital decisions on quality or capacity or to a performance indicator which depends on those decisions (such as average waiting time, or average length of stay). A prospective output price by itself can support the optimal quality and waiting time distribution only if the welfare function respects patient preferences over quality and waiting time, if patients’ marginal rates of substitution between quality and waiting time are independent of income, and if waiting for treatment does not reduce the productivity of patients. If these conditions do not hold, supplementing the output price with a reward linked to the hospital's cost can increase welfare, though it is possible that costs should be taxed rather than subsidised.

Valuing Mortality Risk in the Time of COVID-19

In evaluating the appropriate response to the COVID-19 pandemic, a key parameter is the rate of substitution between mortality risk and wealth or income, conventionally summarized as the value per statistical life (VSL). For the United States, VSL is estimated as approximately $10 million, which implies the value of preventing 100,000 COVID-19 deaths is $1 trillion. Is this value too large? There are reasons to think so. First, VSL is a marginal rate of substitution and the potential risk reductions are non-marginal. The standard VSL model implies the rate of substitution of wealth for risk reduction is smaller when the risk reduction is larger, but the implied value of non-marginal risk reductions decreases slowly until the value accounts for a substantial share of income, after which it decreases sharply; average individuals are predicted to be willing to spend more than half their income to reduce one-year mortality risk by only 1 in 100. Second, mortality risk is concentrated among the elderly, for whom VSL may be smaller and who would benefit from a persistent risk reduction for a shorter period because of their shorter life expectancy. Third, the pandemic and responses to it have caused substantial losses in income that should decrease VSL. In contrast, VSL is plausibly larger for risks (like COVID-19) that are dreaded, uncertain, catastrophic, and ambiguous. These arguments are evaluated and key issues for improving estimates are highlighted.

Trade-offs analysis of sustainability dimensions using integer-valued data envelopment analysis

Conducting an in-depth exploration of trade-offs between sustainability aspects is a notable matter of taking decisions. Furthermore, there are many real world investigations that trade-offs and sustainability should be dealt with in the presence of desirable and undesirable materials while some of them accept integer amounts. Therefore, this study addresses trade-offs of sustainability dimensions when undesirable and integer-valued measures are presented. For this purpose, approaches based upon data envelopment analysis (DEA) are proposed. To explain, DEA models are introduced to calculate individual and group marginal rates of substitution and also directional marginal rates of substitution when integer and undesirable variables are observed. These procedures are applied to calculate trade-offs between different sustainability dimensions, including economic, environmental and social ones. The applications of ports and industrial parks are provided to clarify the approaches appeared in this study. The results derived from the proposed strategies show the usefulness and validity of them.

On the Existence of Positive Equilibrium Profits in Competitive Screening Markets

We assume a fixed number of symmetric firms, competition in prices, constant returns to scale and frictionless consumer choices. Consumers differ in their preferences and profitability (e.g., due to heterogeneous risk aversion and loss probabilities), which creates adverse selection. Firms can offer multiple contracts to screen individuals, in equilibrium and in any deviation. We show that equilibrium profits vanish if each consumer has a unique optimising bundle at equilibrium prices or, more generally, if there exists a linear ordering over of contracts that dictates the preferences of firms whenever consumers are indifferent between multiple optimal contracts. For instance, equilibrium profits vanish if the marginal rate of substitution of quality for price is sharper for profit than for utility. In particular, profit also vanishes if utility equals the sum of (negative) profit, and a surplus (eg, due to risk aversion). We pro- vide examples of economies where there exists an equilibrium with strictly positive profit and show that these examples are robust (hold for an open set of economies).

Text-Based Mutual Fund Peer Groups

The proliferation of mutual fund strategies is a longstanding puzzle in the asset management literature. To gain new insight into this topic, we introduce a method for categorizing funds based on the strategy descriptions in their prospectuses. The resulting Strategy Peer Groups (SPGs), constructed using unsupervised machine learning, capture novel information about the funds and are more detailed than existing style categories. Where the prior literature finds that more unique funds experience greater flows, we find instead that investors prefer funds whose portfolio weights and characteristics are closer to the SPG averages. Investors also favor funds with high SPG-adjusted returns, while different investor clienteles—represented by retail, institutional, and retirement share classes—differ in their allocations across peer groups. Our results are consistent with a mutual fund industry that caters to distinct investor clienteles with heterogeneous marginal rates of substitution, rather than investors with a general preference for variety.

Contracting with moral hazard, adverse selection and risk neutrality: when does one size fit all?

This paper studies a principal-agent relationship when both are risk-neutral and in the presence of adverse selection and moral hazard. Contracts must satisfy the limited-liability and monotonicity conditions. We provide sufficient conditions under which the optimal contract is simple, in the sense that each type is offered the same contract. These are: the action and the agent’s type are complements, and the output’s cumulative distribution function is such that the marginal rate of substitution between the action and the agent’s type is the same for each possible output realization. Furthermore, under the average monotone likelihood ratio property, the optimal contract is a call-option contract as in Innes (J Econ Theory 52(1):45–67, 1990). The results shed light on the fact that sometimes contracts are not highly dependent on individual characteristics as predicted in most pure moral hazard and pure adverse selection settings.

Risk attitudes over small and large stakes recalibrated

In this paper I provide bounds on the marginal rate of substitution between losing $x and winning $y, starting from wealth level $w, for a risk averse individual that rejects a small stake gamble for a range of initial wealth levels. I then prove a theorem that can be used to identify the kinds of large stakes that would be rejected by any such individual. The theorems allow us to understand how much risk aversion is embedded in anyone’s rejections of certain small stakes gambles and provide tighter connections between the results in Rabin (2000) and the received theory of decision making under risk.

Transaction Services, Neutrality of Money, and Marginal Impatience

This paper examines the issues of neutrality and optimum quantity of money in the context in which transaction services of money are imputed and enter a utility functional of a recursive class. We show that the results are diametrically different from the case of money in the utility function. The reason is due to the fact that in response to changes in nominal interest rates, agents adjust their real balance holdings hyperbolically to keep the marginal rate of substitution between real balances and consumption unitary. As of steady state, we show that capital intensity, consumption, transaction services, the rate of time preference, and agent’s welfare are all invariant to monetary expansion, which is termed hyperneutrality. This strong neutrality holds whether the marginal impatience is increasing or decreasing in consumption and real balances. Friedman’s argument for the optimum quantity of money and the optimum money supply rule is, therefore, no longer applicable. To distinguish transactions services from money accords with Walras’s crucial distinction between money as a stock and its services of availability as a flow.

The shadow prices of CO2 and SO2 for Chinese Coal-fired Power Plants: A partial frontier approach

Shadow prices are widely employed in guiding environmental policies. This paper contributes to the literature by developing a novel partial frontier approach for estimating shadow prices. The proposed method is advanced in handling outliers, and provides a precise estimation of the marginal rate of substitution along the production frontier. To cope with the different disposability characteristics of undesirable emissions, SO2 is treated as an environmental input that is strongly disposable. Because most different undesirable outputs are jointly reduced, this study is the first to use directional derivatives instead of partial derivatives and proposes a new separation method that separates individual directional shadow price from the cost of joint reduction of multiple undesirable outputs. We apply the proposed method to a sample of 93 coal-fired power plants covering six years. The estimated average shadow prices of CO2 and SO2 are 69 $/tonne and 2525 $/tonne under the newly developed partial frontiers. When assuming some undesirable output to be strongly disposable, both shadow prices fall (20.32 $/tonne and 1018.23 $/tonne). The present paper suggests the estimated shadow prices will be much different across different levels of disposability. The cost of joint reduction is calculated as 91.05 $/unit given the current production level, which leads to a directional shadow price for the two undesirable outputs of 91.32 $/tonne and 1250.06 $/tonne. The estimated shadow prices for both undesirable outputs dispersed widely under the partial frontiers. Spatial distribution of estimated shadow prices shows that coastal provinces and municipalities have higher CO2 shadow prices but lower SO2 shadow prices, whereas the northeast provinces are the opposite. The CO2 shadow price is comparatively stable over the study period while the SO2 shadow price fluctuates. Policy implications are discussed.

Uncertainty under hyperbolic discounting: the cost of untying your hands

Purpose The relevance of present consumption bias on personal finance has been confirmed in several studies and has important theoretical and practical implications. It has important, measurable implications when analyzing commitment or self-control, adherence to healthy habits (e.g. exercising or dieting), procrastination tendencies or savings. The purpose of this paper is to contribute to our understanding of these issues by postulating a model of income uncertainty within a hyperbolic discounting framework that measures the cost of financial intertemporal inconsistencies related to this bias. The emphasis is on the analysis of this cost. We also propose experimental designs and consistent estimation methods, as well as agent-based modelling extensions. Design/methodology/approach The authors develop a finite-horizon model with hyperbolic preferences. Individuals have a present bias distinct from their discount rate so their choices face intertemporal inconsistencies. The authors further extend the analysis with uncertainty about future incomes. Specifically, individuals live for three periods, and the authors find the optimal consumption levels in the perfect-information benchmark by backward induction. They then proceed to add biases and uncertainty to characterize their implications and measure the costs of the intertemporal inconsistencies they cause. Findings The authors measure how an agent's utility is greater when they “tie their hands” than when they are free to re-evaluate and change their consumption schedule. This “cost of being vulnerable to falling into temptation” only depends (increasingly) on the measure of the present bias and (decreasingly) on the discount factor. They analyze the varying effects on utility and consumption of changes in impatience and optimism. They conclude by discussing theoretical and practical implications; they also propose agent-based simulations, as well as empirical and experimental designs, to further test the relevance and applications of the results. Practical implications This model has important, measurable implications when analyzing commitment or self-control, adherence to healthy habits (e.g. exercising or dieting), procrastination tendencies or savings. Social implications The results enhance the estimation of the costs of present biases such that employers can better identify the incentives required to acquire and retain human capital. The authors provide evidence that workers are vulnerable to contract renegotiations and about the need for a regulator that restores ex-ante efficiency. Similarly, in the private sector, firms could recognize the postulated consumer profiles and focus their resources on anxious, too-optimistic or potentially addictive consumers; this, again, provides some justification about the need for a regulator. Originality/value In traditional exponential discounting, the marginal rate of substitution of consumption between two points depends only on their distance; thus, it allows none of the intertemporal inconsistencies we often observe in real life. Therefore, hyperbolic discounting better fits the data. The authors model choice under uncertainty and focus on the costs caused when present biases (ex-post) push behaviour away from ex-ante optimality. They conclude by proposing experimental designs to further enhance the estimation and implications of these costs. The postulated refinements have the potential to improve previous analyses on commitment devices and commitment-related regulation.

Preferences for centralised emergency medical services: discrete choice experiment

ObjectivesIt is desirable that public preferences are established and incorporated in emergency healthcare reforms. The aim of this study was to investigate preferences for local versus centralised provision of all...

REAL WAGE RIGIDITY, HETEROGENEITY, AND THE BUSINESS CYCLES

This paper investigates the quantitative implications of real wage rigidities and heterogeneity for two long-lasting puzzles in the business cycle literature: the low correlation between total hours worked and labor productivity and the large volatility of the labor wedge, defined as a gap between the marginal rate of substitution of aggregate leisure for aggregate consumption and the marginal product of aggregate labor. I shed light on these issues by extending a heterogeneous-agent model with an indivisible labor supply choice to real wage rigidities. I find that a small amount of real wage stickiness would be sufficient to resolve both anomalies when long-term wage contracts and heterogeneity are taken into account.

370P - Patient preferences for breast cancer treatments: A discrete choice experiment from four European countries

BackgroundPatients’ involvement in the health technology assessment (HTA) decision-making process is important for transparency, legitimacy and fairness. The study objectives were to understand breast cancer patients’ perspectives when choosing their treatment, highlight treatment characteristics valued as most important by patients and gain information on patients’ trade-offs between available treatments. MethodsA discrete choice experiment survey of breast cancer patients was conducted in Spain, Poland, France and Ireland. The survey design included: literature review, qualitative research, cognitive debriefing, data collection and analysis. A panel of experts from participating countries (physicians, patient group representatives, ex-payers) selected the survey treatment attributes: progression-free survival (PFS), febrile neutropenia (FN), pain, functional well-being (FWB) and out-of-pocket payment (OPP). Patients selected (or opted-out) between two unlabelled hypothetical treatments containing the previously mentioned five attributes. Panels of breast cancer patients were recruited as respondents and the questionnaire was deployed through a website platform. A D-efficient experimental design with 16 choice-sets was constructed and a conditional logistic model was used to estimate patients’ preferences. Marginal rates of substitution (MRS) was used to estimate out-of-pocket payments. ResultsIn total, 317 breast cancer patients completed the survey. FWB and pain were the most important attributes chosen by patients. Respondents were willing to pay €17,288 out-of-pocket to move from severe to no impairment in FWB, followed by moderate impairment (€15,297) and from severe pain to no pain state (€15,138). Patients would pay €574 annually for one additional PFS month. Preferences differed by age for FN and FWB; highly educated patients have stronger preference for PFS compared to non-highly educated. ConclusionsBreast cancer treatments that improve pain, FWB and PFS are considered preferred treatments from patients’ perspective. Legal entity responsible for the studyNovartis Oncology Region Europe. FundingNovartis Oncology Region Europe. DisclosureT. Konstantopoulou: Full / Part-time employment: Novartis Oncology. E. Stamuli: Research grant / Funding (institution): Novartis Oncology Region Europe. D. Ross: Advisory / Consultancy: Novartis Oncology Region Europe. R. Pacheco: Full / Part-time employment: Novartis Oncology Region Europe.

Revisiting Equity Premium Puzzles in a Data-Rich Environment

Abstract This paper modifies the conventional representative-agent consumption-based equilibrium models by making the habit-formation part depend on additional factors related to economic conditions. This paper assumes that innovations in the consumption surplus ratio are determined not only by consumption growth but also by other macroeconomic and financial factors. The resulting model allowed for a separation between the intertemporal elasticity of substitution and risk aversion. The model also generates highly volatile Intertemporal marginal rate of substitution which translates into fluctuating volatility capturing time varying economic uncertainty. The long-standing equity premium puzzle seems to have been resolved. The resulting pricing model accounts for a number of interesting properties, such as time-varying risk aversion, small relative risk aversion and an equity premium that is compatible with the observed equity premium. These results are obtained with admissible range of local relative risk aversion. In addition, the model generated small risk-free rate resolving the interest rate puzzle.

The Taste for Status in International Comparison

This paper provides the first comparative analysis of the preference for social status across countries. We develop and provide support for two hypotheses: the cultural foundations hypothesis, which claims that individuals’ preferences for status are rooted in persistent cultural values, and the standard of living hypothesis, which states that in more developed economies, relative income matters more and absolute income matters less to individual utility. To investigate these hypotheses, we propose a theoretically grounded measure of the taste for status, the marginal rate of substitution of relative for absolute income. We find empirical support both of these hypotheses. Specifically, we find that the taste for status is positively associated with individualism, egalitarianism and per capita income. We also identify and provide evidence regarding two threshold values of the taste for status, which are associated with the onset of status preferences and with the emergence of an hedonic treadmill. Our estimates indicate that most countries fall between these two thresholds, and thus experience a positive taste for social status. Only the poorest and most hierarchical and collectivist countries fall below the threshold for a taste for status, and only the richest and most individualist and egalitarian countries experience an hedonic treadmill.

Employers’ preferences for IT-retrainees: evidence from a discrete choice experiment

PurposeThe purpose of this paper is to present the results of a discrete choice experiment (DCE) on the competencies of potential information technology (IT)-retrainees. The results give insights in the monetary value and relative returns to both soft and hard skills.Design/methodology/approachThe authors apply a DCE in which the authors propose seven pairs of hypothetical candidates to employers based in the municipality of Amsterdam, the Netherlands. These hypothetical candidates differ on six observable skill attributes and have different starting wages. The authors use the inference from the DCE to calculate the marginal rates of substitution (MRS). The MRS gives an indication of the monetary value of each skill attribute.FindingsEmployers prefer a candidate who possesses a degree in an exact field over a similar candidate from another discipline. Programming experience from previous jobs is the most highly valued characteristic for an IT-retrainee. Employers would pay a candidate with basic programming experience a 53 percent higher starting wage. The most high-valued soft skill is listening skills, for which employers are willing to pay a 46 percent higher wage. The results of this paper show that both hard and soft skills are important, but not all soft skills are equally important.Originality/valueThe results on the returns to skills provide guidelines to tailor IT training and retraining programs to the needs of the business environment. A key strength of this paper is that the authors have information on the preference orderings for different skills and kinds of experience.

Bargains in the diamond market? How to take advantage from online information

AbstractThis paper empirically analyses the price of diamonds from different perspectives. The sample data contains detailed information on more than 165,000 diamonds certified by Gemological Institute of America, which can be purchased since July 2016 from a large online diamond supplier. Our empirical analysis allows to extend the classic 4Cs model in several directions as follows: (a) the classical 4Cs model is insufficient in order to explain the price, so that other attributes, such as polishing, symmetry, and fluorescence, must be incorporated to accurately estimate the price of a particular piece; (b) the large sample size allows us to analyse specific price ranges characterized by high market activity; (3) a very detailed analysis has been conducted for round diamonds, incorporating interactions between attributes within the regression model and studying the marginal rates of substitution between diamond weight and alternative characteristics given a certain price. Our model is able to detect diamonds that could constitute a clear market opportunity for buyers. This model can help to select efficient demand options taking advantage of the information available on the website, improving the overall efficiency of exchange in this sector.