Substitution Utility Function Research Articles

General Equilibrium in a Heterogeneous-Agent Incomplete-Market Economy with Many Consumption Goods and a Risk-Free Bond

General equilibrium models have been extensively studied in economics, with seminal works by Arrow, Debreu, McKenzie, Gale, and Nikaido providing a proof for the existence of general equilibrium in a pure exchange economy. However, while the recently popular dynamic incomplete-markets models have attracted attention, the existence results for these models have remained limited. In “General equilibrium in a heterogeneous-agent incomplete-market economy with many consumption goods and a risk-free bond,” Light extends some general equilibrium results to a dynamic incomplete-market economy with many consumption goods and a risk-free bond. Under mild conditions, using a well-known excess demand approach, the article establishes the existence of general equilibrium, showing that the methods used to prove existence in the static pure exchange economy can be used in the much more complicated dynamic incomplete-market setting. The article also establishes uniqueness and comparative statics results for the special case where the agents’ preferences can be represented by a constant elasticity of substitution utility function with an elasticity of substitution greater than or equal to one.

Financial opening, financial development and industrial restructuring: a mediating effect analysis

PurposeThe purpose of this study is to probe into the influence mechanism of financial opening onto industrial restructuring from the prism of financial development and examine the role of the credit market, capital market and currency market in transmitting the impact of financial opening onto industrial restructuring in both developed countries and developing countries.Design/methodology/approachIn the theoretical model, the indicator of financial opening was introduced in Cobb–Douglas production function formula. Using constant elasticity of substitution utility function, based on Engel’s law, the optimal industrial structure in the economy was concluded. For the empirical analysis, data was collected from 36 developed countries and 34 developing countries during the period 2000 to 2019. Multiple mediator models with bootstrap techniques were used to identify the linkage between financial opening, financial development and industrial restructuring.FindingsFirst, there is a U-shaped relationship between financial opening and industrial restructuring. Second, financial development plays a mediating role in transmitting the effects of financial opening onto industrial restructuring mainly through the credit market at the global level. Third, developed countries are in a trend of “reindustrialization,” while developing countries show a trend of “premature deindustrialization.” Moreover, for developed countries, the capital market leads to reindustrialization, while the credit market and currency market contribute to deindustrialization. For developing countries, the capital market and credit market lead to deindustrialization, while the currency market contributes to industrialization.Originality/valueUnlike most previous researches, this paper focuses on examining three-variable relationship between financial opening, financial development and domestic industrial restructuring. Against the backdrop of the pandemic, monetary policy shifts of developed economies have led to an increase in cross-border capital flows, which will lead to the increasing risks for international financial markets and the reallocation of the global value chain. It is of great significance to clarify the linkage between these three variables in the face of a volatile international financial environment.

The Optimal Urban Scale from Different Perspectives and under Different Development Goals Based on the CES Utility Function

To analyze the differences in the optimal urban scale of a country, a government, and residents under different urban development goals and to provide a reference for urban development, an urban development model is constructed based on the constant elasticity of substitution (CES) utility function. The objective function includes four indicators: the economic level, the traffic level, environmental quality, and living conditions. The urban development model is constructed by integrating an urban road planning model, bus route planning model, land use model, and four-stage traffic sharing and traffic allocation model. Based on the setting of different development goals, this model is used to calculate the urban utility value perceived by each stakeholder at different urban scales. Through comparative analysis, we determine the following: (1) When the urban development goals are different, the optimal urban scale of residents and the government differs greatly, and the optimal scale of the country differs very little. (2) When facing the same development goal, the optimal urban scales of the three stakeholders are not the same. However, the three stakeholders are closely related to urban development. Therefore, the selection of the optimal urban scale should comprehensively consider the interests of the three stakeholders.

Price Index Numbers under Large-Scale Demand Shocks–The Japanese Experience of the COVID-19 Pandemic

Abstract We investigate the prices and quantities of face masks when the 2020 COVID-19 pandemic was particularly serious to understand the impact of demand shocks on the cost of living index (COLI). Using a recently developed index number formula that is exact for the constant elasticity of substitution utility function with variable preferences, we quantified the degree of demand shock caused by the pandemic. Our empirical analysis revealed that shifts in preferences during the pandemic were so large that the COLI with variable tastes became very different from the standard superlative indexes. While the prices of face masks decreased in the Fisher index in May 2020 by 0.76% per week, the COLI increased by 1.92% per week.

Validation of Improved Dynamic Spectrum and Traffic Management Models of Internet Pricing of Fair DSL-LTE Multiple QoS Network

Currently, the development of communication technology is very rapid, especially on the internet. Therefore, with the increasing need for the internet, the quality of service must also be improved. This study aims to analyze the sensitivity of the internet pricing scheme model using the modified Cloud Radio Access Network (C-RAN) model with the addition of the fair network traffic management variable and combined with the Constant Elasticity of Substitution (CES) utility function. C-RAN is a centralized radio access network to process signals and send them to the core network where the equipment used is connected to cellular antennas. The improved C-RAN model is modified into 2 cases, each of which has 3 pricing schemes, namely flat-fee, usage-based and two-part tariff, with the provision of initial usage and a predetermined amount of bandwidth consumption. This research data is secondary data obtained from the local server of local server traffic data in Palembang. Based on the analysis that has been done, the results of this study indicate that the improved C-RAN model can be utilized by Internet Service Providers (ISPs) to increase profits. The results of the sensitivity analysis for the improved model show that, if the variable is infinity, the increase and decrease are not fixed, whereas if the variable is 0.000 then the increase and decrease are fixed.

The wage premium and market structure: theory and empirical evidence from Chilean manufacturers

PurposeThis paper aims to examine how the “wage premium,” the percentage by which wages earned by skilled workers exceed those of unskilled workers, varies across industries characterized by different levels of competitiveness.Design/methodology/approachA theoretical model employing constant elasticity of substitution (CES) utility function and constant returns to scale production function is developed and analyzed to derive the effects of industry competitiveness on the wage premium. Econometric methods are applied to Chilean manufacturing data to test implications of theoretical model.FindingsOnce the relative factor endowment is being controlled, market competition significantly reduces the wage premium. More specifically, given with the same relative factor endowment, the wage premium is significantly higher under oligopolistic competition than under monopolistic competition. Empirical evidence from Chilean manufacturers supports our theoretical conclusions.Practical implicationsDuring economic development, the reallocation of production factors from unskilled labor-intensive to skilled labor-intensive industries raises the wage premiums received by skilled workers. Besides, skilled workers will earn higher wages by working in more highly concentrated industries instead of more competitive industries. This needs to be considered by government policymakers who must balance promotion of technical change with prevention of extreme the income inequality.Originality/valueThis paper examines how market structure affects wage premiums, providing new insights into a well-established literature that largely maintains that wage premiums are primarily a function of relative factor endowments or international trade.

Is cultural taste in Finland acquired from mother, father or both

The main goal of this paper is to address the importance of parental cultural taste in explaining cultural participation among older adults in Finland. The study considers the intergenerational transfer hypothesis and asks: Do middle-aged or older consumers inherit cultural tastes from their parents? How stable are these intergenerational transfer effects? Which parental hobbies are the most influential? A constant elasticity of substitution (CES) utility function is used to describe the structure of consumer preferences. The linear demand system to be estimated uses the seemingly unrelated systems (SUR) method with two equations. If the intergenerational transfer hypothesis is valid, parental interest in movies, pop music, classical music and visual arts should have a positive impact on their children’s demand for movies, rock or jazz music, classical music and art gallery visits, respectively. The results indicate that the intergenerational transfer hypothesis is valid. Children do indeed inherit their cultural habits and taste from their parents. We seem to visit similar cultural events to those that our parents do or did. The youngest age cohort is by far the most influenced by parental interest in classical music. The visual arts and pop music interests of parents seem to be second and third most influential hobbies but only when the youngest age cohorts are considered. Parental pop music and sport hobbies are the most influential sources when the cultural and sports participation of the middle-aged are studied. A mother’s visual arts interests and father’s sports interests are most important determinants of the cultural and sports participation decisions of the oldest age cohort. In general age, gender and education are important determinants of cultural participation. The youngest, who have less family constraints, are more active than the middle-aged and those over 55 are more active participants – except for filmgoing or rock music. Theatre attendance, arts gallery visits and classical music concert visits increase after age 45. Attending musicals is not dependent on education while all other cultural events are elite in terms of education, except rock music concerts, which well-educated parents, attend less than the reference group, which is students. Women are more active in all cultural activities studied here. Most of the intergenerational transfer effects are not stable throughout the child’s age. Only a mother’s classical music or visual art habits seem to have a stable and positive effect on the classical music concert participation and on the art gallery visits of the child regardless of age. However, a father’s corresponding classical music or visual art habits have a positive effect on their children, when they are aged between 15 and 35, attending classical music concerts and going to art galleries. Keywords : Intergenerational transfer, Cultural participation, Finland, CES. DOI: 10.7176/JCSD/62-07 Publication date: November 30 th 2020

Altruism and Selfishness in Believable Game Agents: Deep Reinforcement Learning in Modified Dictator Games

This article focuses on using deep reinforcement learning, specifically proximity policy optimization, to train agents in a social dilemma game, modified dictator game, in order to investigate the effect of selfishness and altruism on the believability of the game agents. We present the design and implementation of the training environment, including the reward functions which are based on the findings of established empirical research, with three agent profiles mapped to the three standard constant elasticity of substitution (CES) utility functions, i.e., selfish, perfect substitutes, and Leontief, which measure different levels of selfishness/altruism. The trained models are validated and then used in a sample game, which is used to evaluate the believability of the three agent profiles using the agent believability metrics. The results indicate that players find altruistic behaviour more believable and consider selfishness less so. Analysis of the results indicates that human-like behavior resulting from the application of artificial intelligence evolves from perceived human behavior rather than the observed. The analysis also indicates that selfishness/altruism may be considered as an extra dimension to be included in the believability metrics.

Investigations to the price evolutions of goods exchange with CES utility functions

The price evolutions of goods exchange in multi-agent market are investigated by employing the kinetic theory. Assume that a closed market consists of two groups (A and B) of agents, who have the same preferences for goods. The constant elasticity of substitution (CES) utility function which contains Cobb–Douglas utility function and Leontief utility function, is used to describe the agent’s preferences. A system of linear Boltzmann type equation is given to describe the probability distributions of goods for agents of the two groups, in which the agents are allowed to adopt certain trading strategies to maximize their utility and improve their wealth conditions. We assume that agents in group A put all their goods into the market for maximum utility, while agents in group B aim to acquire maximal utility from goods exchange by suitably selecting the percentage of goods which are exchanged. The effects of different trading strategies on commodity price and wealth distribution are discussed. The results show that the trading strategies of agents in group B have effectively improved their wealth status under certain assumptions. Also, a general system of nonlinear Boltzmann equation for the probability distributions of goods is given to describe the pricing issues of goods exchange for agents. The numerical experiments of nonlinear Boltzmann equations demonstrate how the trading strategies and preferences of agents modify the price of goods.

Differential discounting in the economic evaluation of healthcare programs

BackgroundThe question of appropriate discount rates in health economic evaluations has been a point of continuous scientific debate. Today, it is widely accepted that, under certain conditions regarding the social objective of the healthcare decision maker and the fixity of the budget for healthcare, a lower discount rate for health gains than for costs is justified if the consumption value of health is increasing over time. To date, however, there is neither empirical evidence nor a strong theoretical a priori supporting this assumption. Given this lack of evidence, we offer an additional approach to check the appropriateness of differential discounting.MethodsOur approach is based on a two-goods extension of Ramsey’s optimal growth model which allows accounting for changing relative values of goods explicitly. Assuming a constant elasticity of substitution (CES) utility function, the growth rate of the consumption value of health depends on three variables: the growth rate of consumption, the growth rate of health, and the income elasticity of the willingness to pay for health. Based on a review of the empirical literature on the monetary value of health, we apply the approach to obtain an empirical value of the growth rate of the consumption value of health in Germany.ResultsThe empirical literature suggests that the income elasticity of the willingness to pay for health is probably not larger but rather smaller than 1 and probably not smaller but rather larger than 0.2. Combining this finding with reasonable values of the annual growth rates in consumption (1.5–1.6%) and health (0.1%) suggests, for Germany, an annual growth rate of the consumption value of health between 0.3 and 1.5%.ConclusionIn the light of a two-goods extension of Ramsey’s optimal growth model, the available empirical evidence makes the case for a growing consumption value of health. Therefore, the current German practice of applying the same discount rate to costs and health gains introduces a systematic bias against healthcare technologies with upfront costs and long-term health effects. Differential discounting with a lower rate for health effects appears to be a more appropriate discounting model.

The state must compete: Optimal pricing of legal cannabis

AbstractWe examine the socially optimal pricing strategy for the legal cannabis industry that faces significant competition from an illicit market. We explore the impact of different preferences for legal and illicit cannabis using a constant elasticity of substitution utility function. We find that under a range of policy objectives and other circumstances, the socially optimal pricing strategy is for the legal market price to be dramatically lower than the illicit market price. This contradicts the approach taken across Canada in the year since legalization. These findings suggest that governments should adopt policies to reduce the price of legal cannabis.

Public Good Provision Financed by Nonlinear Income Tax Under Reduction of Envy

Abstract We examine optimal taxation and public good provision by a government that considers reduction of envy as a constraint. We adopt the extended envy-freeness proposed by Diamantaras and Thomson (1990. “A Refinement and Extension of the No-Envy Concept.” Economics Letters 33: 217–22), called λ-equitability. We derive the modified Samuelson rule under an optimal nonlinear income tax and show, using a constant elasticity of substitution utility function, that the direction of distorting the original Samuelson rule to relax the λ envy-free constraint is crucially determined by the elasticity of substitution. Furthermore, we numerically show that the optimal level of provision increases (decreases) in the degree of envy-freeness when the original Samuelson rule is upwardly (downwardly) distorted.

Approximating Walrasian Equilibria

This paper proposes a price adjustment process that converges globally for a set of pure exchange economies, in which each agent has a Constant Elasticity of Substitution utility function. In this process, the auctioneer approximates demand schedules by assuming that each trader has a Cobb–Douglas utility function. The process generates prices that cannot be represented by linear combinations of previous prices, and hence precludes cycles. In the so-called unstable Scarf economies, prices spiral towards the Walrasian equilibrium in the same direction as found by Scarf. Simulation in large scale Scarf economies suggests that the speed of convergence may be polynomial in the size of the economy.

A Flexible Responsive Load Economic Model for Industrial Demands

The best pricing method for any company in a perfectly competitive market is the pricing scheme with regards to the marginal cost. In contrast to this environment, there is a market with imperfect competition. In this market, the price can be affected by some players in the generation/demand side (i.e., suppliers and/or buyers). In the economic literature, “market power” refers to a company that has the power to affect prices. In fact, market power is often defined as the ability to divert prices from competitive levels. In the electricity market, especially because of the integration of intermittent renewable energy resources (RESs) along with the inflexibility of demand, there are levels of market power on the supply side. Hence, implementation of demand response (DR) programs is necessary to increase the flexibility of the demand side to deal with the intermittency of renewable generations and at the same time tackle the market power of the supply side. This paper uses economic theories and mathematical formulations to develop a flexible responsive load economic model (FRLEM) based on real-time pricing (RTP) to show modification of the load profile and mitigation of the energy costs for an industrial zone. This model was developed based on constant elasticity of the substitution utility function, known as one of the most popular utility functions in microeconomics.

How vehicle market is segmented and influenced by subsidy policy: A theoretical study

This paper studies how vehicle market is segmented among consumers and what impacts subsidy policy may have on segmentation. With constant elasticity of substitution utility function and unit demand, we find positive market share for both high-end and low-end vehicles, but not necessary for middle-end vehicles. Market segmentation may have two regimes according to different levels of subsidy on electric vehicles (EVs), and only a sufficiently high subsidy allows for the existence of low type EV market share welcomed by median income consumers. An EV subsidy cut will definitely crowd out the market share of high type EV and expand that of internal combustion engine vehicle (ICEV). And given in a regime where low type EVs survive, EV subsidy cut’s influence on low type EV market share is ambiguous, which depends on the relative consumer density around decision cutoff points.

Economic demand response model in liberalised electricity markets with respect to flexibility of consumers

Before restructuring in the electricity industry, the primary decision-makers of the electricity market were deemed to be power generation and transmission companies, market regulation boards, and power industry regulators. In this traditional structure, consumers were interested in receiving electricity at flat rates while paying no attention to the problems of this industry. This attitude was the source of many problems, sometimes leading to collapse of power systems and widespread blackouts. Restructuring of the electricity industry however provided a multitude of solutions to these problems. The most important solution can be demand response (DR) programs. This study proposes an economic DR model for residential consumers in liberalised electricity markets to change their consumption pattern from times of high-energy prices to other times to maximise their utility functions. This economic model is developed based on constant elasticity of substitution utility function known as one of the most popular utility functions in microeconomics. Simulation results indicate that the proposed model is adaptable to any group of residential consumers with any disposition towards participation in DR programs and can be adjusted for any time period according to the preference given by the residential consumer.

The Welfare Comparison of Ad-Valorem Tax and Specific Tax with Both Quality and Quantity Choice of a Consumer

This paper compares ad-valorem and specific taxation in models where a representative consumer with an exogenous income has both a quality and a quantity choice under perfect competition. In the setting, while ad-valorem tax causes income effect only, specific tax causes both income effect and substitution effect. Therefore, ad-valorem tax decreases consumer demand for both quality and quantity; on the other hand, specific tax decreases consumer demand for quantity. However, the sign of consumer demand for quality is ambiguous and is determined by the curvature of marginal utility on quantity. Additionally, using a constant elasticity of substitution (CES) utility function and a linear price function, we show that ad-valorem tax is superior to specific tax except for the Leontief preference under which the two forms of commodity taxes generate the same tax revenue. The substitution effect caused by specific tax disappears if the elasticity of substitution converges to zero.

Solving the consumer’s utility-maximization problem with CES and Cobb-Douglas utility function via mathematical inequalities

This paper presents a new, non-calculus approach to solving the consumer’s utility–maximization problem with constant elasticity of substitution (CES) utility function, as well as with Cobb-Douglas utility function in case of \(n\ge 2\) commodities. Instead of using the Lagrange multiplier method or some other method based on differential calculus of several variables which might give complicated terms and equations difficult to handle, the utility–maximization problems are solved by using Jensen’s inequality and weighted arithmetic-geometric mean (weighted AM–GM) inequality. In comparison with calculus methods, such approach does not require checking first and second order conditions.

The effects of allowance price on energy demand under a personal carbon trading scheme

Personal carbon trading (PCT) is a downstream cap-and-trade scheme which could be used to reduce carbon emissions from the household sector. To explore the effectiveness of this scheme, it is necessary to investigate how consumers respond to allowance price change. In this paper, a general utility optimization (GUO) model and a constant elasticity of substitution (CES) utility function are proposed to examine the price, substitution and income effects of carbon allowance price changes. It is shown that higher income consumers are more sensitive to the allowance price changes than lower income consumers. Moreover, the short-run adjustment in consumers’ consumption of electricity in response to a change in allowance price would be lower than the long-run value. According to the sensitivity analysis, downward (upward) adjustments in the elasticity of substitution result in a positive (negative) effect on price effect. The findings in this study are used to draw policy implications. Suggestions for future research are also provided.

On the Social Efficiency in Monopolistic Competition Models

We consider standard monopolistic competition models with aggregate consumer's preferences defined by two well-known classes of utility functions -- the Kimball utility function and the variable elasticity of substitution utility function. It is known that market equilibrium is efficient only for the special case when utility function has a constant elasticity of substitution, but we find that in both cases a special tax on firms' output may be introduced such that market equilibrium becomes efficient.