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Micro Theory

Paper Session

Saturday, Jan. 5, 2019 2:30 PM - 4:30 PM

Atlanta Marriott Marquis, M105
Hosted By: American Economic Association
  • Chair: Eun Jeong Heo, Vanderbilt University

Distributive Justice for Behavioral Welfare Economics

Michael Mandler
University of London


Suppose the conflicting decisions of an individual at different decision-making frames are aggregated by unanimity into one preference. For example, an agent subject to status quo bias could place a value on a good that varies with the agent’s endowment. The behavioral preference that aggregates by unanimity would then judge the individual to be better off with the good only if all of the valuations exceed the agent’s payment. Since such behavioral preferences will typically be incomplete, they lead to a large set of Pareto optimal allocations: policymaking thus becomes problematic. This paper offers a utilitarian alternative that can discriminate more effectively among policy options.

The incompleteness of behavioral preferences manifests itself as sets of preferred bundles that are kinked and thus supported by multiple price vectors. The Pareto optima are therefore also supported by multiple price vectors and consequently, following small changes from optimal allocations, supporting price vectors will continue to be present. By the first welfare theorem, all allocations near to a Pareto optimum are optimal as well. Pareto optimality thus cannot locally screen policy decisions.

Utilitarianism can address the oversupply of optima without requiring a planner to supply the preference comparisons that individuals are unable to make definitively for themselves. But since classical models of utilitarianism do not allow preferences to be incomplete, the classical model must be reworked.

When behavioral preferences are incomplete, agents can still have well-defined utilities for 'groups' of goods. For example, agents can have von-Neumann-Morgenstern utilities for the goods delivered at particular states which they weight with probabilities that depend on the decision-making frame. For each group of goods, planners can cardinally compare the utilities of individuals for these goods and incorporate these comparisons into social welfare functions. Due to the incompleteness of the individual preferences, a planner will have multiple social welfare functions. There is nevertheless a unique utilitarian optimum when utilities are separable across groups (as in expected utility theory). If utilities fail to be separable, the precision of utilitarianism is reduced but the dimension of the utilitarian optima still falls markedly relative to the dimension of the Pareto optima.

Utilitarian optima can in principle fail to be Pareto optimal but we show that as preferences become more incomplete this possibility cannot occur.

Emotions, Risk Attitudes, and Patience

Armando N. Meier
University of Chicago


Previous work has shown that preferences are not always stable across time, but surprisingly little is known about the reasons for this instability. I examine whether variation in people's emotions over time predicts changes in preferences. Using a large panel dataset, I find that within-person changes in happiness, anger, and fear have substantial effects on risk attitudes and patience. Robustness checks indicate a limited role of alternative explanations. I further address potential endogeneity concerns by exploiting information about the death of a parent or a child. This identification strategy confirms a large causal impact of emotions on preferences.

Market Insurance, Self-Insurance and Self-Protection if Consumers Value their Privacy

Irina Gemmo
Goethe University Frankfurt


Monitoring consumers’ behavior can mitigate information asymmetries that lead to moral hazard in insurance markets. A perspective premium reduction can incentivize consumers to engage in activities to reduce losses or prevent them. Yet, some consumers value their privacy and dislike sharing private information with insurers. Individuals therefore have two decisions to make simultaneously: (1) The level of market insurance and/or costly effort for self-insurance and self-protection (2) The extent of information disclosure to insurers. In a theoretical framework with continuous effort levels, endogenous disclosure of effort and continuous privacy costs, I investigate whether and in which way privacy concerns alter consumers' optimal decision to purchase market insurance and to invest effort into self-insurance and self-protection.
The optimal effort levels and the optimal insurance coverage for any given level of information disclosure do not directly depend on the disutility an individual exhibits from sharing private information. However, the optimal level of effort disclosure depends on individuals' valuation of private information and the effort signal affects consumers' optimal decision with respect to effort invested into self-protection and self-insurance activities as well as consumers' demand for market insurance. If the level of disclosure increases, the disutility stemming from privacy concerns is traded off against the utility stemming from a premium priced more accurately on self-protection efforts.
The results of this analysis can help to substantiate the discussion on consumer protection with respect to regulating the use of private data. Further, it can be useful for insurers to understand the interlinkages of policyholders' risk mitigating behavior and their willingness to reveal private information.

Narratives, Imperatives and Moral Reasoning

Jean Tirole
Toulouse School of Economics and IAST
Roland Bénabou
Princeton University
Armin Falk
University of Bonn


By downplaying externalities, magnifying the cost of moral behavior, or suggesting not being pivotal, narratives allow individuals to maintain a positive image when in fact acting in a morally questionable way; conversely, they may help make society a better one. We investigate when narratives emerge from a narrative entrepreneur or the individual herself, and when they spread virally. We then turn to how narratives compete with imperatives, i.e., moral rules or precepts, as alternative modes of communication to persuade agents to behave morally, and identify the conditions under which Kantian behavior will emerge in an otherwise fully utilitarian environment. Finally, we shed light on the validity of the multiple-price-list methodology used in experiments.

Persuasion with Unknown Beliefs

Svetlana Kosterina
Princeton University


A sender designs a signal structure to persuade a receiver to choose one action over another. The sender is maximally ignorant about the receiver's prior on the states where the sender and the receiver disagree about the best action and has additional information about the receiver's prior on other states. I characterize the optimal signal structures in this environment. The lack of knowledge of the receiver's prior causes the persuasion mechanism to never completely give up: the optimal signal recommends the high action with a strictly positive probability in all states. I show that the probability that the high action is recommended is continuous in the state and the optimal signal may reveal the state with some probability. Finally, I show that the solution to the problem of persuasion with unknown beliefs is the same as the solution to the problem of persuading all members of a large group with heterogeneous priors.
JEL Classifications
  • D0 - General