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Revisiting CES utility functions for distributional preferences: Do people face the equality–efficiency trade-off?

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  • Keigo Inukai
  • Yuta Shimodaira
  • Kohei Shiozawa

Abstract

The constant elasticity of substitution (CES) function is widely used to model distributional preferences in modified dictator games. However, it has been pointed out that its parameter interpretations are inconsistent and problematic in applications. We constructed a model to address this issue by combining two formulations of the CES function. We demonstrated that the proposed model provides consistent interpretations of parameters. Our results clarified that the conventional interpretations of the standard CES function parameters for describing distributional preferences are inappropriate. Notably, “the equality–efficiency trade-off,” a conventional interpretation of the substitution parameter, is unrelated to observed individual behaviors.

Suggested Citation

  • Keigo Inukai & Yuta Shimodaira & Kohei Shiozawa, 2022. "Revisiting CES utility functions for distributional preferences: Do people face the equality–efficiency trade-off?," ISER Discussion Paper 1195, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:1195
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    References listed on IDEAS

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    Cited by:

    1. Keigo Inukai & Yuta Shimodaira & Kohei Shiozawa, 2022. "Investigation of the Convex Time Budget Experiment by Parameter Recovery Simulation," ISER Discussion Paper 1185r, Institute of Social and Economic Research, Osaka University, revised Mar 2023.

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