Mean-Dispersion Preferences and Constant Absolute Uncertainty Aversion

We axiomatize, in an Anscombe-Aumann framework, the class of preferences that admit a representation of the form V(f) = mu - rho(d), where mu is the mean utility of the act f with respect to a given probability, d is the vector of state-by-state utility deviations from the mean, and rho(d) is a measure of (aversion to) dispersion that corresponds to an uncertainty premium. The key feature of these mean-dispersion preferences is that they exhibit constant absolute uncertainty aversion. This class includes many well-known models of preferences from the literature on ambiguity. We show what properties of the dispersion function rho(dot) correspond to known models, to probabilistic sophistication, and to some new notions of uncertainty aversion.Ambiguity aversion, Translation invariance, Dispersion, Uncertainty, Probabilistic sophistication

Introduction to Judgment Aggregation

This introduces the symposium on judgment aggregation. The theory of judgment ag­gregation asks how several individuals' judgments on some logically connected propo­sitions can be aggregated into consistent collective judgments. The aim of this intro­duction is to show how ideas from the familiar theory of preference aggregation can be extended to this more general case. We first translate a proof of Arrow's impos­sibility theorem into the new setting, so as to motivate some of the central concepts and conditions leading to analogous impossibilities, as discussed in the symposium. We then consider each of four possible escape-routes explored in the symposium.Judgment aggregation, Arrow's theorem, Escape routes

Poverty, policy, and industrialization : lessons from the distant past

Pessimists say industrialization increased poverty; optimists say it did not. The authors argue that how much industrialization eradicates poverty depends on the form industrialization takes. It is not economic growth by itself, but the processes and policies associated with different growth regimes which make the poor poorer. The authors address two questions : 1) what happened to the proportionate share of the population living in poverty, and to the living standards of the poor, during nineteenth century industrial revolutions?; and 2) why did poverty statistics behave the way they did? Modern economic growth may erode traditional entitlements that serve as safety nets in preindustrial societies. It may be convenient to think otherwise, but typically the poor in preindustrial European and North American societies were not supported by the family and private institutions. Much of the responsibility for the poor lay with the state and other formal, statelike institutions that intervened in food markets. Where laissez-faire policies were adopted during the Industrial Revolution, as in America and England, many of the poor (especially the extremely poor) became more vulnerable to adverse conditions.Environmental Economics&Policies,Services&Transfers to Poor,Rural Poverty Reduction,Safety Nets and Transfers,Governance Indicators

Decomposable Choice Under Uncertainty

Savage motivated his Sure Thing Principle by arguing that, whenever an act would be preferred if an event obtains and preferred if that event did not obtain, then it should be preferred overall. The idea that it should be possible to decompose and recompose decision problems in this way has normative appeal. We show, however, that it does not require the full separability across events implicit in Savage's axiom. We formulate a weaker axiom that suffices for decomposability, and show that this implies an implicit additive representation. Our decomposability property makes local necessary conditions for optimality, globally sufficient. Thus, it is useful in computing optimal acts. It also enables Nash behavior in games of incomplete information to be decentralized to the agent-normal form. None of these results rely on probabilistic sophistication; indeed, our axiom is consistent with the Ellsberg paradox. If we assume probabilistic sophistication, however, then the axiom holds if and only if the agent's induced preferences over lotteries satisfy betweenness.Sure-thing principle, decomposability, uncertainty, computation, dynamic programming solvability, agent-normal form games, non-expected utility, betweenness

Preference for Information and Dynamic Consistency

We provide necessary and sufficient conditions for a dynamically consistent agent always to prefer more informative signals (in single-agent problems). These conditions do not imply recursivity, reduction or independence. We provide a simple definition of dynamically consistent behavior, and we discuss whether an intrinsic information lover (say, an anxious person) is likely to be dynamically consistent.Information, non-expected utility, dynamic consistency, randomization, anxiety

Third Down with a Yard to Go: The Dixit-Skeath Conundrum on Equilibria in Competitive Games

In strictly competitive games, equilibrium mixed strategies are invariant to changes in the ultimate prizes. Dixit and Skeath argue that this seems counter-intuitive, and it is a challenge to the expected utility theory. We show that this invariance is robust to dropping the independence axiom, but is removed if we drop the reduction axiom. The conditions on the resulting recursive expected-utility model to get the desired outcome are analogous to conditions used in the standard model of comparative statics under risk.

Standing on the Shoulders of Babies: Dominant Firms and Incentives to Innovate

Critics of Microsoft and Google's dominance claim these companies are nothing but "giants standing on the shoulders of babies," whose dominance destroys the incentives for entrants to innovate. By contrast, pro-Microsoft and pro-Google analysts stress the benefits of large, innovative firms. We analyze the validity of these competing claims in a model of R&D and product market competition between a dominant firm and a small rival. An increase in firm dominance, which we measure by a premium in consumer valuation, increases the dominant firm's incentives but decreases the rival firm's incentives for R&D. We provide sufficient conditions such that the positive effect on the dominant firm is mostly infra-marginal, whereas the negative effect on the rival firm is mostly marginal. As a result, the R&D encouragement effect is lower than the R&D discouragement effect; and if innovation is sufficiently important then firm dominance also decreases consumer and social surplus. We also provide conditions such that an increase in firm dominance increases the probability of innovation, essentially because the transfer of innovation incentives form the rival firm to the dominant firm reduces the probability of duplicative R&D efforts

Dominant Firms, Imitation, and Incentives to Innovate

We provide a simple framework to analyze the effect of firm dominance on incentives for R&D. An increase in firm dominance, which we measure by a premium in consumer valuation, increases the dominant firm’s incentives and decreases the rival firm’s incentives for R&D. These changes influence the probability of innovation through two ef- fects: changes in total R&D effort and changes in how this total is distributed between the two firms. For a given level of total research effort, the shift from the rival firm to the dominant firm is a good thing as it decreases the likelihood of duplicate innovation (we call this the duplication effect). However, the shift in research effort is not one-to-one. The dominant firm’s benefit from increased dominance is more inframarginal than marginal when compared to the rival firm’s disincentive. As a result, total research effort decreases when firm dominance increases (we call this the total effort effect). We show the total effort effect dominates the duplication effect when intellectual property protection is weak, and the opposite when property rights are strong. That is, firm dominance is good for innovation when (but only when) property rights are strong. We also examine consumer and social surplus