Prospect Theory (PT) has become the most credited alternative to Expected Utility Theory (EUT) as a theory of decision under uncertainty. This paper characterizes the optimal income tax and audit schemes under tax evasion, when taxpayers behave as predicted by PT. We show that the standard EUT...

This paper studies, both theoretically and experimentally, frame effects in the context of a public good game in which players have to make a costly contribution either i) to achieve or ii) not to lose a non excludable monetary prize. Our protocol leads to public good provision (not...

The rise in consumption inequality in response to the increase in income inequality over the last three decades in the U.S. is puzzling to expected-utility-based incomplete market models. The two-sided lack of commitment models exhibit too little consumption inequality while the standard...

We analyze extensively the characteristics of the solution to an irreversibleinvestment decision when the only source of uncertainty comes from interest rates.They are assumed to be driven by the popular Cox-Ingersoll-Ross (CIR) stochasticprocess. Particular attention is paid to the impact that...

The Ellsberg paradox demonstrates that peoples belief over uncertainevents might not be representable by subjective probability. We relate this paradox to other commonly observed anomalies, suchas a rejection of the backward induction prediction in the one-shot Ultimatum Game. We argue that the...

Agents involved in the formation of a social or economic network typically face uncertainty about the benefits of creating a link. However, the interplay of such uncertainty and risk attitudes has been neglected in the network formation literature. We propose a dynamic network formation model...

We obtain explicit expressions for the subjective, objective and market value of perpetual executive stock options (ESOs) under exogenous employment shocks driven by an independent Poisson process. Within this setup,we obtain the executive's optimal exercise policy which allows us to analyze the...