We study the link between credit spreads and the heterogeneous formation of expectations in an economy where agents with different perception of economic uncertainty disagree about future cash flows of a defaultable firm. The intertemporal risk-sharing of disagreeing investors gives rise to three testable implications: First, larger belief heterogeneity increases credit spreads and their volati...

The Savagian choice-theoretic construction of subjective probability does not apply to preferences, like those in the Ellsberg Paradox, that reflect a distinction between risk and ambiguity.We formulate two representation results—one for expected utility, the other for probabilistic sophistication—that derive subjective probabilities but only on a “small” domain of risky events. Risky events ca...

Individuals often tend to conform to the choices of others in group decisions, compared to choices made in isolation, giving rise to phenomena such as group polarization and the bandwagon effect. We show that this behavior — which we term the consensus effect — is equivalent to a well-known violation of expected utility, namely strict quasi-convexity of preferences, which is shared by many popu...

We investigate to what extent genuine social preferences can explain observed other-regarding behavior. In a social dilemma situation (a dictator game variant), subjects can choose whether to learn about the consequences of their choice for the receiver. We find that a majority of subjects showing other-regarding behavior when the payoffs of the receiver are known choose to ignore them if possi...

Privacy regulations can affect the willingness to collect personal health data that may be disclosed to insurers. Perfect privacy cannot always be guaranteed. Consequently, people may refrain from collecting personal health data. This paper provides a theoretical and experimental analysis of the importance of privacy regulations for information acquisition and disclosure behavior. We contrast t...

Although ecologists have long recognized the salience of persistence in determining the static and the dynamic behavior of ecological systems, it is only very recently that economists have begun to study this concept in relation to the use of services that are provided by jointly determined ecological-economic systems (ecosystems). As such, there are very few studies of ecosystems that explicit...

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...

We consider conditions under which the representation of the world available to a boundedly rational decision-maker, whose awareness increases over time, constitutes an adequate ‘small world’ (in the sense of Savage 1954) for the assessment of a given decision. Equivalently, we consider whether boundedly rational decision-makers who gradually become aware of all relevant contingencies, can purs...

Limited Attention as the Scarce Resource in an Information-rich Economy This paper uses basic empirical facts from attention and perception psychology for a behavioral approach to equilibrium analysis at the industry and the macroeconomic level. The paper endogenously determines whether an economy is information-rich and whether scarcity of attention complements economic scarcity. A conventiona...

Article history: Received 27 October 2007 Received in revised form 18 June 2008 Accepted 18 June 2008 Available online 26 June 2008 This paper investigates the effect of stock market microstructure on managerial compensation schemes. We propose and empirically demonstrate that the sensitivity of chief executive officer's (CEO's) compensations to changes in stockholders' value is higher when the...