Intertemporal Utility and Correlation Aversion
AbstractConvenient assumptions about qualitative properties of the intertemporal utility function have generated counter-intuitive implications for the relationship between atemporal risk aversion and the intertemporal elasticity of substitution. If the intertemporal utility function is additively separable then the latter two concepts are the inverse of each other. We review a simple theoretical specification with a long lineage in the literature on multi-attribute utility, and demonstrate the critical role of a concept known as intertemporal risk aversion or intertemporal correlation aversion. This concept is the intertemporal analogue of a more general concept applied to two attributes of utility, but where the attributes just happen to be the time-dating of the good. In the context of intertemporal utility functions, the concept provides an intuitive explanation of possible differences between (the inverse of) atemporal risk aversion and the intertemporal elasticity of substitution. We use this theoretical structure to guide the design of a series of experiments that allow us to identify and estimate intertemporal correlation aversion. Our results show that subjects are correlation averse over lotteries with intertemporal income profiles, and that the convenient additive specification of the intertemporal utility function is not an appropriate representation of preferences over time.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Durham University Business School in its series Working Papers with number 2011_03.
Date of creation: 01 Mar 2011
Date of revision:
Contact details of provider:
Postal: Durham University Business School, Mill Hill Lane, Durham DH1 3LB, England
Phone: +44 (0)191 334 5200
Fax: +44 (0)191 334 5201
Web page: http://www.dur.ac.uk/business
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-22 (All new papers)
- NEP-CBE-2011-09-22 (Cognitive & Behavioural Economics)
- NEP-EVO-2011-09-22 (Evolutionary Economics)
- NEP-EXP-2011-09-22 (Experimental Economics)
- NEP-MIC-2011-09-22 (Microeconomics)
- NEP-UPT-2011-09-22 (Utility Models & Prospect Theory)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Antoine Bommier, 2011.
"Life-Cycle Preferences Revisited,"
CER-ETH Economics working paper series
11/155, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
- Cheung, Stephen L., 2012. "Risk Preferences Are Not Time Preferences: Comment," IZA Discussion Papers 6762, Institute for the Study of Labor (IZA).
- Diego Ubfal, 2013.
"How General Are Time Preferences? Eliciting Good-Specific Discount Rates,"
473, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Ubfal, Diego, 2012. "How General Are Time Preferences? Eliciting Good-Specific Discount Rates," IZA Discussion Papers 6774, Institute for the Study of Labor (IZA).
- Drichoutis, Andreas & Nayga, Rodolfo, 2012. "Do risk and time preferences have biological roots?," MPRA Paper 37320, University Library of Munich, Germany.
- Steffen Andersen & James C. Cox & Glenn W. Harrison & Morten Lau & E. Elisabet RutstrÃ¶m & Vjollca Sadiraj, 2012.
"Asset Integration and Attitudes to Risk: Theory and Evidence,"
Experimental Economics Center Working Paper Series
2012-12, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
- Steffen Andersen & James C. Cox & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem & Vjollca Sadiraj, 2011. "Asset Integration and Attitudes to Risk: Theory and Evidence," Working Papers 2011_10, Durham University Business School.
- Georges Dionne & Jingyuan Li & Cedric Okou, 2012. "An Extension of the Consumption-based CAPM Model," Cahiers de recherche 1214, CIRPEE.
- Drichoutis, Andreas & Nayga, Rodolfo, 2013. "A reconciliation of time preference elicitation methods," MPRA Paper 46916, University Library of Munich, Germany, revised 12 May 2013.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (IT Office).
If references are entirely missing, you can add them using this form.