It is routine to demonstrate in the exchange economy framework that small changes of individual preferences and endowments always result in small changes of the derived excess demand functions as one should expect. Though being as desirable for reasons of the consistency of the whole approach, however, a precise proof of the converse direction so far is still open to question. The present paper...

The theory of economic growth takes little notice of what is happening on the demand side of the markets so that ever more goods and services can be sold. In order to make progress, this paper revives a classical notion in economics, the concept of wants, and re-casts it in terms of a behavioral theory. Hypotheses are discussed concerning the wants people pursue, the changes in these wants, and...

The higher our aspirations, the higher the probability that we have to adjust them downwards when forming more realistic expectations later on. This paper shows that the costs induced by high aspirations are not trivial. We first develop a theoretical framework to identify the factors that determine the effect of aspirations on expected utility. Then we present evidence from a lab experiment on...

Do violations of classical rationality theory imply that agents are acting against their self-interest? To answer this question, we investigate whether completeness and transitivity necessarily hold when agents choose outcome rationally—that is, their choice sequences do not lead to dominated outcomes. We show that, because of the danger of money pumps and other manipulations, outcome rationali...

We apply the theoretical model of endogenous reference-dependence of Ok, Ortoleva and Riella (2011) to the theory of vertical product differentiation. We analyze the standard problem of a monopolist who offers a menu of alternatives to consumers of different types, but we allow for agents to exhibit a form of endogenous reference dependence like the attraction effect. We show that the presence ...

The paper assesses the welfare effects of different ways of allocating input price risk between a regulated utility, consumers and speculators in a futures market. A risk-averse utility setting a fixed retail price requires a price that exceeds expected marginal cost, unless an efficient futures market is available. The firm bears no risk when input price risk is transferred to consumers, but c...

This paper presents a numerical method for pricing American call options where the underlying asset price follows a jump-diffusion process. The method is based on the Fourier-Hermite series expansions of Chiarella, El-Hassan and Kucera (1999), which we extend to allow for Poisson jumps, in the case where the jump sizes are log-normally distributed. The series approximation is applied to both Eu...

This paper develops a revealed preference methodology for exploring whether time inconsistencies in household choice are the product of nonstationarities at the individual level or the result of individual heterogeneity and renegotiation within the collective unit. An empirical application to household-level microdata highlights that an explicit recognition of the collective nature of choice al...

This paper describes how a monopolist manipulates the balance of quantity and quality in order to increase revenue when its customers treat quantity and quality as substitutes. This ‘skewing’ of quality depends on the characteristics of customer’s demand for quality. Customers differ in demand for quality, because they differ in either (i) their preferences and/or (ii) their time cost per unit....

We propose a model of natural recovery, a widespread yet unexplained aspect of addictive behavior, starting from the recent theory developed by Bernheim and Rangel (2004). While the Bernheim and Rangel model generates many distinctive patterns of addiction, it does not explicitly consider pathways to natural recovery. Based on insights from the neurosciences, we introduce an ”implicit cognitive...