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Revealed preference analysis of expected utility maximization under prize-probability trade-offs

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  • Cherchye, Laurens
  • Demuynck, Thomas
  • De Rock, Bram
  • Freer, Mikhail

Abstract

We provide a revealed preference characterization of expected utility maximization in binary lotteries with prize-probability trade-offs. We start by characterizing optimizing behavior when the empirical analyst exactly knows the utility function or the probability function of winning. Next, we consider the situation with both the probability function and the utility function unknown. In this case utility maximization has empirical content when imposing the mild shape restriction that at least one of these functions is log-concave.

Suggested Citation

  • Cherchye, Laurens & Demuynck, Thomas & De Rock, Bram & Freer, Mikhail, 2022. "Revealed preference analysis of expected utility maximization under prize-probability trade-offs," Journal of Mathematical Economics, Elsevier, vol. 99(C).
  • Handle: RePEc:eee:mateco:v:99:y:2022:i:c:s0304406821001622
    DOI: 10.1016/j.jmateco.2021.102607
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