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Collective Risk-taking Decisions With Heterogeneous Consumption Externalities and time preference

IAS   Wuhan university
Abstract:
This article adds consumption externalities and heterogeneous time preference to Arrow-Debreu portfolio model. It’s assumed that each agent has a utility which is a function of her own consumption and of the average consumption in the group to which he belongs. And the agents have heterogeneous time preference: in our article we assume they have different discount factors for utility. Individual degrees of risk aversion and conformism are also heterogeneous within each group and between different groups in the economy. We show the properties of efficient allocations of resources and of shadow prices. We also explore the relationship between Consumption Externalities and time preference

Keywords:  Consumption externalities, conformism, time preference, discounting, investment and consumption

1 Introduction

A classical assumption in the Economics that agents are selfish, which implies their utility function is only based on their own consumption. However this assumption is challenged by present investigation. For example, when two classmates graduated from universities, they both apply for PhD program: if one gets an offer from MIT, obviously this has a positive effect on the other classmate. It seems that if one classmate gets a rejection letter from the PhD program he applies, this unlucky things will also has a adverse effect on the other classmate’s welfare. These interdependencies of preferences may be either in born or caused by environment. For example, in the field of assessing performance of manager, it is often the case that a manager in one sectors get bonuses that are dependent on the performance of the other manager in another sector. (yardstick competition).
The idea of comparing consumption can be traced to as early as Adam Smith. It is generally considered that Veblen (1899) is the founder of this approach. He stressed that “ the accepted standard of expenditure in the community or in the class to which a person belongs largely determines what his standard of living will be.”
We consider an economy which is partitioned in different groups of consumers. Groups are representative of households, peasants, social group. This partition is taken given in this paper. The agent’s utility function is depending upon both his own consumption and the average consumption of the group to which he belongs. Gollier(2002) measure the degree of conformism of this agent by the increase in his consumption that leaves his marginal utility unchanged for a unit increase in the average consumption in his group.
Saving and investment decision reflect time preference, more often than not, people prefer an immediate utility reward to the same reward given one moment later. This means people are impatient. This pure preference for the present, or impatience, has long been discussed by economists. As early as in 1937, Samuelson introduced in the classical model the assumption that consumers maximize the discounted value of the flow of their utility. He utilized an exponentially decreasing discount factor, i.e. with a constant rate of impatience. Frederick, Loewenstein and O’Donoghue (2002) make a survey on the estimating individuals’ discount rate. They get two noteworthy findings: one is that high discount rates predominate. Second, there is本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。