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We study asymmetric first-price procurements with unobserved heterogeneity and asymmetric risk-aversion. For this model, we propose a new empirical method that allows us to predict the expected procurement cost at any reserve price. Being able to perform such detailed counterfactual analysis is necessary to determine the cost-minimizing reserve prices and measure the associated inefficiencies. Using new data from public procurements in Russia for four different kinds of jobs, we find no unobserved heterogeneity, but find bidder-asymmetry in both costs and risk-aversion that vary across the jobs. We find that bidders are highly risk-averse and choosing non-binding reserve prices would minimize procurement costs, whereas assuming risk neutrality would have generated larger costs and lower efficiency. Assuming identical risk-aversion would also mislead policy analysis.

The recent literature on individual vs. group decisions over risk has brought about divergent results, mainly depending on the institutional rules through which groups take decisions. While some studies where group decisions relied on the majority rule showed no appreciable difference between individuals and groups’ preferences, others where unanimity among group members was required found collective decisions to be less risk averse than individual ones. Of course, these studies share the imposition of a choice rule to determine the groups’ outcome. Alternatively, in the study at hand, we elicited groups’ preferences over risk using a consensus rule, i.e. leaving groups free to endogenously solve the potential disagreement among their members, just as in many real life instances. Our results from a logit regression unambiguously show that individuals’ preferences are systematically further from the risk neutrality than those of groups. In particular, individuals are more risk seeker than groups when facing gambles with positive expected payoff difference and more risk averse in the opposite case.

In a dynamic trading model, investors with heterogeneous beliefs have an option to sell the stock now and buy it back later. Due to this repurchase option and the risk aversion of investors, it is possible for the stock price to be lower than the lowest valuation among investors even when the short-sales constraint is binding. This result contrasts that of Harrison and Kreps (1978) in which due to a resale option and risk neutrality, a bubble always arises. We also demonstrate that in a static model, there exists neither a bubble nor a negative bubble.

We investigate whether individual and group risk preferences are dependent on reward delay. To do so, we run a lottery-choice experiment, where payments are made either directly or in 3, 9, or 18 months after the experiment. We find that risk preference is time-dependent for both individuals and groups. In the present, groups make more risk-averse decisions than individuals do. As soon as decisions materialize in the future, this relation reverses, with groups becoming less risk-averse in their decisions and reaching almost risk neutrality at 18 months. Both, individuals and groups, do not significantly differ in their risk preferences between the different delays. We present a parameterization of the probability time trade-off model extended by the probability of prospect survival and show that our results are consistent with the affect-based reasoning explanation.

If you put two mounds of sugar with identical conditions near an ants’ nest, which one will the ants congregate at? Kirman explained the process of ant social herding using a simple model, and he conducted an interesting simulation. The fat tail distribution in the security market is well known, but its causes have not been sufficiently clarified. As an extension of the research of Kirman, Nirei and Watanabe tried to connect the fat tail distribution to microeconomic foundations, but there are many strong assumptions that are indispensable to the model such as the monotone likelihood ratio property (MLRP), risk neutrality, a demand curve that bends to the upper right, and an automatic supply; furthermore, the theoretical structure of the model is extremely complex. In this paper, by establishing a simple security market model and by applying the model of Kirman, the fat tail observed for price fluctuations is reproduced. Identical to Kirman and Nirei and Watanabe, the beauty contest of Keynes is kept in mind, and it is shown that a cause of the fat tail is the balance between independence and interdependence of the economic agents.

This paper provides new field evidence on risk preferences over small stakes. Using unique population and survey data on deductible choice in Dutch universal health insurance, we find that risk preferences are a dominant factor in decision-making. In fact, our results indicate that risk preferences are both statistically and quantitatively more significant in explaining deductible choice behavior than risk type. This finding contrasts with classical expected utility theory, as it implies risk neutrality over small stakes. More recently developed reference-dependent utility models, however, can rationalize risk aversion over small stakes, on account of loss aversion and narrow framing.

The allocation of control rights is a key issue in incomplete contracts. In this paper, we add an exit option, the right of early termination, to the standard agency model for employment contracts. We address two questions: (1) Who should have this right? (2) What is the effect of its inclusion in a contract? Under risk neutrality, we find that (1) it does not matter for investments and economic efficiency to whom this right belongs, although it may affect con-tractual terms and income sharing, and (2) although the allocation of this right does not mat-ter, its inclusion can have either a positive or a negative effect on economic efficiency. Our analysis provides a benchmark for more general studies on control rights under risk aversion.

A disadvantage of multiple-choice tests is that students have incentives to guess. To discourage guessing, it is common to use scoring rules that either penalize wrong answers or reward omissions. These scoring rules are considered equivalent in psychometrics, although experimental evidence has not always been consistent with this claim. We model students' decisions and show, first, that equivalence holds only under risk neutrality and, second, that the two rules can be modified so that they become equivalent even under risk aversion. This paper presents the results of a field experiment in which we analyze the decisions of subjects taking multiple-choice exams. The evidence suggests that differences between scoring rules are due to risk aversion as theory predicts. We also find that the number of omitted items depends on the scoring rule, knowledge, gender and other covariates.

We estimate individual risk attitudes using controlled experiments in the field in Denmark. These risk preferences are elicited by means of field experiments involving real monetary rewards. The experiments were carried out across Denmark using a representative sample of 253 people between 19 and 75 years of age. Risk attitudes are estimated for various individuals differentiated by socio-demographic characteristics such as income and age. Our results indicate that the average Dane is risk averse, and that risk neutrality is an inappropriate assumption to apply. We also find that risk attitudes vary significantly with respect to several important socio-demographic variables. We also report support for constancy of relative risk aversion for the Danish population as a whole, and for all the identifiable subgroups of the population considered here. These findings have important implications for the characterization of risk attitudes in policy applications, theoretical modeling, and experimental economics.

In this paper we model taxpayers reactions to the possibility of either reporting income as usual and running the risk of an audit or reporting a "cutoff" income and paying a threshold tax that gives the certainty of not being audited. Models of this kind already discussed in the literature assume that taxpayers are risk neutral. We depart from this stream of research by assuming instead that taxpayers have a Constant Relative Risk Aversion (CRRA) utility function and differ in relative risk aversion coefficient and in income. The government can rely upon a signal in order to assess the income class to which the taxpayer belongs and fix the threshold tax. Our main result is that, within each class, the threshold tax is paid by taxpayers whose relative risk aversion lies in a given interval. Taxpayers with high risk aversion and relatively low income file their report as usual. Unlike analogous models under risk neutrality, relatively rich taxpayers with low risk aversion might not pay the threshold tax as well. An equity problem arises.

In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or complete financial markets. Although these assumptions are crucial to the implications of the approach, they are not particularly relevant to most real-world environments where agents face incomplete markets and are exposed to undiversifiable risks. In this paper we extend the real options approach to incorporate risk aversion for a general class of utility functions. We show that risk aversion provides an incentive for the investor to delay investment and leads to a significant erosion in project values.

A notion of forecast quality is defined that is appropriate when returns forecasts are used in a simple investment decision. The relation between the conditional distribution of returns and optimal point forecasts for a risk neutral investor is characterised and it is shown that the conditional mean is a small subset of optimal forecasts. Taking into account potential model misspecification and the structure of the set of optimal forecasts, methods for developing specifically "risk neutral forecasting" models are proposed. Estimation by Empirical Risk Minimisation is shown to converge to parameters associated with optimal decisions and simulations suggest that performance in small samples is acceptable even in unfavourable circumstances. Usefulness of the proposed methods is illustrated with an empirical application in which they dominate popular alternatives.