Rational expectations and loss aversion: Potential output and welfare implications

Ciccarone, Giuseppe; Marchetti, Enrico

doi:10.1016/j.jebo.2012.12.032

Cited by 12 publications

(5 citation statements)

References 20 publications

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“…to activate the mechanism previously discussed. This effect is also evident by direct inspection of equations (9), (10) and (12): a low implies a high value of the exponent in the terms of these equations and this, for example in the case of Y in (9), means that a change in brings about a stronger response of the equilibrium output.…”

Section: Discussion: the Economic Intuitionmentioning

confidence: 89%

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Prospect Theory and Tax Compliance: A Microfounded Equilibrium Perspective

Aprile

Busato

Giuli

et al. 2019

JEE

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This paper discusses the capabilities of a class of microfounded equilibrium models, augmented with Prospect Theory elements in the spirit of al- Nowaihi and Dhami (2007), to address several open questions in the analysis of tax evasion and compliance decisions. There are three main results: i) there exists a unique equilibrium with a tax evasion, consistent with the empirical estimates for the United States economy; ii) the model predicts a positive relationship between tax rate and evasion rate, while offering a solution to the so called Yitzhaki puzzle; iii) the «framing effect» plays a significant role in supporting these results; this is a distinctive characterstic of this class of model, typically not present in simple individual choice models. Furthermore, the model also allows us to investigate some potentially relevant effects of labor supply behavior on the tax compliance decisions.

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Section: Discussion: the Economic Intuitionmentioning

confidence: 89%

“…We first assume a log specification for consumption utility (i.e. ), which is commonly adopted in standard macroeconomic modelling (our results would not qualita- 10 A rigid labor market is characterised by a high , while an elastic one by a low .…”

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confidence: 99%

Prospect Theory and Tax Compliance: A Microfounded Equilibrium Perspective

Aprile

Busato

Giuli

et al. 2019

JEE

Self Cite

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“…Most of the follow‐up literature, including this paper, employ a simplified version of the Prospect Theory by adopting only loss‐aversion and reference‐dependence (DellaVigna, ). Reference‐dependent preferences help explain ubiquitous phenomena such as excessive aversion to small risks in the laboratory (Kahneman and Tversky, ), endowment effect for inexperienced traders (Kahneman et al ., ), resistance of lowering consumption in response to bad news about future income (Bowman et al ., ), the reluctance to sell houses at a loss (Genesove and Mayer, ), equity premium puzzle in asset returns (Benartzi and Thaler, ; Barberis et al ., ), the disposition effect, that is, the tendency to sell winners rather than losers in financial markets (Odean, ), eliminating paradoxical effects of monetary variance in macroeconomic policy (Ciccarone and Marchetti, ), inefficient task allocation in contract theory (Daido et al ., ), the energy paradox (Greene, ), target earnings in labor supply decisions (Camerer et al ., ; Fehr and Goette, ), the tendency to insure against small risks (Sydnor, ), and effort in the employment relationship (Mas, ), among many others.…”

Section: Literature Reviewmentioning

confidence: 99%

Economic Targets and Loss‐aversion in International Environmental Cooperation

İriş

2016

Journal of Economic Surveys

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In the standard emission problem, each country's ruling party decides on an optimal level of emissions by analyzing the cost and benefit to the country. However, such policy decisions are often influenced by political parties' incentives to be elected. Voters tend to give higher priority to economic issues than they do to environmental ones. As a result, political parties have additional incentives to reach a critical economic benefit level, at a cost of higher emission level, in order to satisfy voters' expectations in economic issues. Therefore, this study explores the implications of political parties being averse to insufficient economic performance relative to a critical economic target level on sustaining an international environmental agreement on emission levels. In doing so, we allow countries to have asymmetric concerns about economic targets, as well as asymmetric technology levels. We find that stronger concerns about economic targets deter the most cooperative emission levels countries could jointly sustain. Furthermore, technological asymmetry could either deepen or offset this impact. These results suggest that efforts on achieving substantial international environmental agreements should be supported at the citizen level to eliminate the adverse effects.

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“…In economics and psychology, the concept of loss aversion has recently been used to account for the empirical finding that individuals place higher weight on losses than gains, violating the assumption of standard economic theory that tastes are unchanging (Kahneman, 2003). Theories of loss aversion have sprung up with proposed explanations for this ubiquitous phenomenon, occurring in financial markets (e.g., Benartzi & Thaler, 1995), consumption and savings patterns (e.g., Bowman, Minehart, & Rabin, 1999), macroeconomic policy (e.g., Ciccarone & Marchetti, 2013), contract theory (e.g., Daido et al, 2013), real estate transactions (e.g., Genesove & Mayer, 2001), the energy paradox (Greene, 2011), competitive behavior (e.g., Eisenkopf & Teyssier, 2013), and trade (Freund & Ozden, 2008;Tovar, 2009), among others.…”

Section: Introductionmentioning

confidence: 99%

Tipping Points and Loss Aversion in International Environmental Agreements

İriş

Tavoni

2016

SSRN Journal

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We study the impact of loss-aversion and the threat of catastrophic damages, which we jointly call threshold concerns, on international environmental agreements. We aim to understand whether a threshold for dangerous climate change is as an effective coordination device for countries to overcome the global free-riding problem and abate sufficiently to avoid disaster. We focus on loss-averse countries negotiating either under the threat of either high environmental damages (loss domain), or low damages (gain domain). Under symmetry, that is when countries display identical degrees of threshold concern, we show that such beliefs have a positive effect on reducing the emission levels of both signatories to the treaty and non-signatories, leading to higher global welfare and weakly larger coalitions of signatories. We then introduce asymmetry, by allowing countries to differ in the degree of concern about the threat of disaster. We show that stable coalitions are mostly formed by the countries with higher threshold concern. When enough countries having no threshold concern could cause the coalition size to diminish, regardless of the other countries have strong or mild threshold concerns.

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Rational expectations and loss aversion: Potential output and welfare implications

Cited by 12 publications

References 20 publications

Prospect Theory and Tax Compliance: A Microfounded Equilibrium Perspective

Prospect Theory and Tax Compliance: A Microfounded Equilibrium Perspective

Economic Targets and Loss‐aversion in International Environmental Cooperation

Tipping Points and Loss Aversion in International Environmental Agreements

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