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Intertemporal Consumption with Risk: A Revealed Preference Analysis

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  • Lanier, Joshua
  • Miao, Bin
  • Quah, John
  • Zhong, Songfa

Abstract

This paper presents a nonparametric, revealed preference analysis of intertemporal consumption with risk. In an experimental setting, subjects allocate tokens over four commodities, consisting of consumption in two contingent states and at two time periods, subject to different budget constraints. With this data, one could test, using Afriat's Theorem and its generalizations, whether a subject's choices are consistent with utility maximization, and also utility maximization with various additional properties on the utility function. Our results broadly support a model where subjects maximize a utility function that is weakly separable across states but there is little support for weak separability across time. Our result sheds light on the source of the failure of the discounted expected utility model.

Suggested Citation

  • Lanier, Joshua & Miao, Bin & Quah, John & Zhong, Songfa, 2018. "Intertemporal Consumption with Risk: A Revealed Preference Analysis," MPRA Paper 86263, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:86263
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    Cited by:

    1. Lasse Mononen, 2023. "Computing and comparing measures of rationality," ECON - Working Papers 437, Department of Economics - University of Zurich.

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    More about this item

    Keywords

    risk preference; time preference; revealed preference; budgetary choice; Afriat's Theorem; experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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