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Utility of Income as a Random Function. Behavioral Characterization and Empirical Evidence

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Author Info

  • John K. Dagsvik
  • Steinar Strøm
  • Zhiyang Jia

    ()
    (Statistics Norway)

Abstract

The paper proposes a particular approach to model the utility of income. We develop a theoretical framework that restricts the class of admissible functional forms and distributions of the random components of the model. The theoretical approach is based on theories of probabilistic choice and ideas that are used in modern psychophysical research. From our theoretical framework, we obtain the empirical model and the corresponding likelihood function. The empirical analysis is based on a “Stated Preference” survey. The model fits the data quite well. Finally, we discuss the concept of cardinality and the implications for consumer demand relations.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 431.

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Date of creation: Aug 2005
Date of revision:
Handle: RePEc:ssb:dispap:431

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Keywords: Utility of income; Random utility; Invariance principles;

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References

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  1. Simon, Herbert A, 1986. "Rationality in Psychology and Economics," The Journal of Business, University of Chicago Press, vol. 59(4), pages S209-24, October.
  2. McFadden, Daniel L., 2000. "Economic Choices," Nobel Prize in Economics documents 2000-6, Nobel Prize Committee.
  3. van Praag, Bernard M. S., 1991. "Ordinal and cardinal utility : An integration of the two dimensions of the welfare concept," Journal of Econometrics, Elsevier, vol. 50(1-2), pages 69-89, October.
  4. John K. Dagsvik, 2002. "Discrete Choice in Continuous Time: Implications of an Intertemporal Version of the Iia Property," Econometrica, Econometric Society, vol. 70(2), pages 817-831, March.
  5. Dagsvik, John K, 1994. "Discrete and Continuous Choice, Max-Stable Processes, and Independence from Irrelevant Attributes," Econometrica, Econometric Society, vol. 62(5), pages 1179-1205, September.
  6. Patel, Nitin R. & Subrahmanyam, Marti G., 1978. "Utility theory and participation in unfair lotteries," Journal of Economic Theory, Elsevier, vol. 19(2), pages 555-557, December.
  7. Wansbeek, T.J. & Kapteyn, A.J., 1985. "The individual welfare function: A review," Open Access publications from Tilburg University urn:nbn:nl:ui:12-364330, Tilburg University.
  8. Van Praag, Bernard, 1971. "The welfare function of income in Belgium: An empirical investigation," European Economic Review, Elsevier, vol. 11(3), pages 337-369.
  9. Daniel McFadden, 1977. "Modelling the Choice of Residential Location," Cowles Foundation Discussion Papers 477, Cowles Foundation for Research in Economics, Yale University.
  10. Dagsvik, John k: & Strøm, Steinar, 2003. "A Stochastic Model for the Utility of Income," Memorandum 32/2003, Oslo University, Department of Economics.
  11. Praag, B.M.S. van & Kapteyn, A.J., 1994. "How sensible is the leyden individual welfare function of income? A reply," Open Access publications from Tilburg University urn:nbn:nl:ui:12-364387, Tilburg University.
  12. Seidl, Christian, 1994. "How sensible is the Leyden individual welfare function of income?," European Economic Review, Elsevier, vol. 38(8), pages 1633-1659, October.
  13. Van Praag, B.M.S., 1989. "The Relativity of the Welfare Concept," Research Paper 69, World Institute for Development Economics Research.
  14. Buyze, Jeannine, 1982. "The estimation of welfare levels of a cardinal utility function," European Economic Review, Elsevier, vol. 17(3), pages 325-332.
  15. Herwaarden, F.G. van & Kapteyn, A.J., 1979. "Empirical comparison of the shape of welfare functions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-361905, Tilburg University.
  16. Gerard Debreu, 1957. "Stochastic Choice and Cardinal Utility," Cowles Foundation Discussion Papers 39, Cowles Foundation for Research in Economics, Yale University.
  17. Smith, Vernon L, 1985. "Experimental Economics: Reply," American Economic Review, American Economic Association, vol. 75(1), pages 264-72, March.
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Citations

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Cited by:
  1. Aase, Knut K., 2014. "Recursive utility with dependence on past consumption; the continuous-time model," Discussion Papers 2014/3, Department of Business and Management Science, Norwegian School of Economics.
  2. Dagsvik, John K., 2006. "Justifying Functional Forms in Models for Transitions between Discrete States, with Particular Reference to Employment-Unemployment Dynamics," Memorandum 06/2006, Oslo University, Department of Economics.
  3. John K. Dagsvik, 2006. "Axiomatization of Stochastic Models for Choice under Uncertainty," Discussion Papers 465, Research Department of Statistics Norway.
  4. Aase, Knut K., 2014. "Recursive utility and jump-diffusions," Discussion Papers 2014/9, Department of Business and Management Science, Norwegian School of Economics.
  5. John Dagsvik, 2013. "Making Sen’s capability approach operational: a random scale framework," Theory and Decision, Springer, vol. 74(1), pages 75-105, January.
  6. John K. Dagsvik & Zhiyang Jia, 2008. "An Alternative Approach to Labor Supply Modeling. Emphasizing Job-type as Choice Variable," Discussion Papers 550, Research Department of Statistics Norway.
  7. John Dagsvik & Stine Røine Hoff, 2011. "Justification of functional form assumptions in structural models: applications and testing of qualitative measurement axioms," Theory and Decision, Springer, vol. 70(2), pages 215-254, February.
  8. Dagsvik John K., 2010. "Making Amartya Sen’s Capability Approach Operational: A Random Scale Framework for Empirical Modeling," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201005, University of Turin.
  9. John K. Dagsvik & Zhiyang Jia, 2006. "Labor Supply as a Choice among Latent Job Opportunities. A Practical Empirical Approach," Discussion Papers 481, Research Department of Statistics Norway.
  10. Mitsunobu Miyake, 2010. "Convergence theorems of willingness-to-pay and willingness-to-accept for nonmarket goods," Social Choice and Welfare, Springer, vol. 34(4), pages 549-570, April.
  11. Aase, Knut K., 2014. "Heterogeniety and limited stock market Participation," Discussion Papers 2014/5, Department of Business and Management Science, Norwegian School of Economics.
  12. John K. Dagsvik, 2012. "Making Sen’s capability approach operational. A random scale framework," Discussion Papers 710, Research Department of Statistics Norway.

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