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## Sustainability and its relation to efficiency under uncertainty

### Economic Theory (2009-11-01) 41: 297-315 , November 01, 2009

Evaluating the long-run consequences of present actions, as in the context of sustainability, requires information about the actions’ outcomes and about future preferences that is often uncertain. We analyze a risk-based criterion of sustainability and a corresponding efficiency concept that cover these uncertainties. We derive several properties of these criteria and formally characterize the trade-off between sustainability and efficiency. Furthermore, we show that maximizing the probability of ex post efficiency under a sustainability constraint provides an interesting choice rule and that, for a special case, this rule is connected to portfolio theory.

## Ambiguity and the value of information

### Journal of Risk and Uncertainty (2010-04-01) 40: 133-145 , April 01, 2010

The value of information is studied in a non-expected utility model of ambiguity with second-order probabilities. Information that reduces ambiguity has a positive value for ambiguity-averse decision makers, and the value of information that resolves ambiguity increases with greater ambiguity and with greater ambiguity aversion. Since information that resolves risk is valuable, and must also resolve ambiguity, the value of such information for ambiguity averters increases with greater ambiguity and with greater ambiguity aversion.

## Rational preferences under ambiguity

### Economic Theory (2011-10-01) 48: 341-375 , October 01, 2011

This paper analyzes preferences in the presence of ambiguity that are *rational* in the sense of satisfying the classical ordering condition as well as monotonicity. Under technical conditions that are natural in an Anscombe–Aumann environment, we show that even for such a general preference model, it is possible to identify a set of priors, as first envisioned by Ellsberg (Q J Econ 75:643–669, 1961). We then discuss ambiguity attitudes, as well as unambiguous acts and events, for the class of rational preferences we consider.

## Why uncertainty matters: discounting under intertemporal risk aversion and ambiguity

### Economic Theory (2014-08-01) 56: 627-664 , August 01, 2014

Uncertainty has an almost negligible impact on project value in the standard economic model. I show that a comprehensive evaluation of uncertainty and uncertainty attitude changes this picture fundamentally. The illustration of this result relies on the discount rate, which is the crucial determinant in balancing immediate costs against future benefits, and the single most important determinant of optimal mitigation policies in the integrated assessment of climate change. First, the paper removes an implicit assumption of (intertemporal or intrinsic) risk neutrality from the standard economic model. Second, the paper introduces aversion to non-risk uncertainty (ambiguity). I show a close formal similarity between the model of intertemporal risk aversion, which is a reformulation of the widespread Epstein–Zin–Weil model, and a recent model of smooth ambiguity aversion. I merge the models, achieving a threefold disentanglement between risk aversion, ambiguity aversion, and the propensity to smooth consumption over time.

## Time overruns as opportunistic behavior in public procurement

### Journal of Economics (2013-09-01) 110: 25-43 , September 01, 2013

We consider the supplier’s strategic choice on delivery time in a public procurement setting as the result of the firm’s opportunistic behavior on the optimal investment timing when production costs are uncertain. We model the supplier’s trade-off between the option value to defer the contract execution and the penalty payment in the event of delays. We also take into account the issue of penalty enforcement, which in turn depends on both the discretion of the court of law in voiding contractual clauses and the “efficiency” of the judicial system (i.e. the average length of civil trials). We test our main results on Italian public procurement data showing that the supplier’s incentive to delay is greater the higher the volatility of production costs and the lower the “efficiency” of the judicial system. We then calibrate the model using parameters that mimic the Italian scenario on public works procurement and calculate the maximum amount that a supplier is “willing to pay” (per day) to postpone the delivery date and infringe the contract provisions. Our calibration results are consistent with the theoretical model’s predictions and the empirical findings.

## Correcting expected utility for comparisons between alternative outcomes: A unified parameterization of regret and disappointment

### Journal of Risk and Uncertainty (2008-02-01) 36: 1-17 , February 01, 2008

A unified parameterization of an expected utility model corrected for regret and disappointment effects is presented, constrained to conform to a well-known choice pattern, the common consequence effect, a special case of the Allais paradox. For choices subject to regret and disappointment effects to be consistent with this choice pattern, the function that corrects the utility of the obtained outcome has to have a positive second derivative for its regret component and a negative second derivative for its disappointment component. These hypothesized functional forms make predictions about the relative effect that small vs. large differences between obtained and alternative outcomes should have on people’s experiences of regret or disappointment.

## The Welfare Consequences of Strategic Voting in Two Commonly Used Parliamentary Agendas

### Theory and Decision (2007-08-01) 63: 1-40 , August 01, 2007

This paper studies the welfare consequences of strategic voting in two commonly used parliamentary agendas by comparing the average utilities obtained in simulated voting under two behavioural assumptions: expected utility maximising behaviour and sincere behaviour. The average utility obtained in simulations is higher with expected utility maximising behaviour than with sincere voting behaviour under a broad range of assumptions. Strategic voting increases welfare particularly if the distribution of preference intensities correlates with voter types.

## Risk lovers and the rent over-investment puzzle

### Public Choice (2015-07-01) 164: 87-101 , July 01, 2015

In this paper, we prove existence and uniqueness of equilibrium in a rent-seeking contest given a class of heterogeneous risk-loving players. We explore the role third-order risk attitude plays in equilibrium and find that imprudence is sufficient for risk lovers to increase rent-seeking investment above the risk-neutral outcome. Moreover, we show that rent can be fully dissipated in a standard Tullock contest played by a large number of risk-lovers.

## Restrictions and identification in a multidimensional risk-sharing problem

### Economic Theory (2014-06-01) 56: 409-423 , June 01, 2014

We consider $$H$$ expected utility maximizers that have to share a risky aggregate multivariate endowment $$X\in {\mathbb {R}}^{N}$$ and address the following two questions: does efficient risk-sharing imply restrictions on the form of individual consumptions as a function of $$X$$ ? Can one identify the individual utility functions from the observation of the risk-sharing? We show that when $$H\ge \frac{2N}{N-1}$$ efficient risk sharings have to satisfy a system of nonlinear PDEs. Under an additional rank condition, we prove an identification theorem.

## Updating toward the signal

### Economic Theory (2012-08-01) 50: 765-786 , August 01, 2012

Modelers frequently assume (either implicitly or explicitly) that an agent’s posterior expectation of some variable lies between their prior mean and the realization of an unbiased signal of that variable. We call this property updating toward the signal (UTS). We show that if the prior and signal error densities are both symmetric and quasiconcave then UTS will occur. If, for a given prior, UTS occurs for *all* symmetric and quasiconcave error densities, then in fact the prior must be symmetric and quasiconcave. Similar characterizations are derived for two additional updating requirements that are strictly weaker than UTS.