Informal evidence suggests that individuals are willing to pay only a finite and, typically, very low price for a specific lottery that converges to an infinite payment with probability one. The established decision theories (expected value, expected utility theory, cumulative prospect theory) cannot satisfactorily explain this low willingness to pay. The presented paradox strengthens the original and the super St. Petersburg paradox.
We study the employment and distributional effects of regulating (reducing) working time in a general equilibrium model with search-matching frictions. Job creation entails fixed costs, but existing jobs are subject to diminishing returns. We characterize the equilibrium in the de-regulated economy where firms and individual workers freely negotiate wages and hours. Then, we consider the effects of a legislation restricting the maximum working time, while we let wages respond endogenously. Employment effects are sensitive to the representation of preferences. In our benchmark, small reductions in working time, starting from the laissez-faire equilibrium solution, always result in a small increase in the equilibrium employment, while larger reductions reduce employment. The regulation benefits workers, both unemployed and employed (even if wages decrease and even in cases where employment falls), but reduces profits and output.
We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth. We identify a (positive) price effect -- where increasing inequality allows innovators to charge higher prices and (negative) market-size effects -- with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets. It turns out that price effects dominate market-size effects. We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality.
We analyze a macroeconomic model of monopolistic competition in which consumers earn unequal incomes. When preferences are nonhomothetic, the distribution of income affects equilibrium markups and equilibrium product diversity.
I give necessary and sufficient conditions on the payoff set that guarantee uniqueness of the equilibrium in the Rubinstein bargaining model. The conditions encompass a class of non-convex or disconnected payoff sets with discontinuous Pareto frontiers. Roughly speaking, the equilibrium is unique if the objective function of the corresponding Nash-bargaining game has a unique maximum. I extend the analysis to games where the time between offers is not constant.
A betweenness axiom states that if A and B are equally good then a mixture of A and B is equally good as well. This note demonstrates that the violations of the betweenness axiom documented in several experimental studies can be alternatively attributed to the effect of random errors.
In the present allocation of resources in healthcare, preferences of consumers as the ultimate financiers of healthcare services are judged to be of little relevance. This state of affairs is being challenged because the past decade has seen great progress in the measurement of preferences, or more precisely, willingness-to-pay (WTP) as applied to healthcare services. This article reports evidence on WTP of the Swiss population with regard to three hypothetical modifications of the drug benefit to be covered by social health insurance: delaying access to the most recent therapeutic innovations (among them, drugs) by two years in exchange for a reduction of the monthly premium; substituting original preparations by generics, again in return for a lowered premium; and the exclusion of preparations for the treatment of minor complaints from the drug benefit. Using discrete-choice experiments, WTP and its determinants are estimated. Average WTP for avoiding such a delay (which acts across the board) is much higher than for eschewing the exclusive use of generics (which are claimed to be largely equivalent to the original) or the retention of 'unimportant' drugs in the list of benefits – a rating predicted by economic theory. In addition, a great deal of preference heterogeneity between the French-speaking minority and the German-speaking majority was found, pointing to considerable efficiency losses caused by uniformity of social health insurance.
There is growing interest in discrete-choice experiment (DCE) as a method to elicit consumers' preferences in the health care sector. Increasingly this method is used to determine willingness to pay (WTP) for health-related goods. However, its external validity in the health care domain has not been investigated until now. This paper examines the external validity of DCE concerning the reduction of a health risk. Convergent validity is examined by comparing the value of a statistical life with other preference elicitation techniques, such as revealed preference. Criterion validity is shown by comparing WTP values derived from stated choices in the experiment with those derived from actual choices made by the same individuals. Both tests provide strong evidence in favour of external validity of the DCE method.
A joint Wharton School–World Bank conference called attention to the high proportions of medical care spending paid out of pocket in most developing countries. One of the reasons for this, attendees said, is the problem in such economies of generating high tax revenues in a nondistortive way. Since people are paying out of pocket, they should be able to afford some private insurance that can spread the risk of above-average out-of-pocket payments. The potential efficiency gains from greater use of voluntary private insurance seem large, but there are a number of possible impediments to the emergence of such insurance.
We consider a simple class of dynamic games. A continuum of players chooses between two actions (“locations”) in each period; per-period payoffs depend positively on the number of players choosing the same action. The resulting dynamics are investigated. If one location receives a favorable shock, the effects of the strength of externalities and the heterogeneity of the population on the extent of adjustment may be non-monotone and discontinuous, due to two competing effects. With stronger externalities (lower heterogeneity), less players move initially, but more players follow once the process has gained momentum.
