Utility of income as a random function: Behavioral characterization and empirical evidence
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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- van Praag, Bernard M. S. & Kapteyn, Arie, 1994. "How sensible is the Leyden individual welfare function of income? A reply," European Economic Review, Elsevier, vol. 38(9), pages 1817-1825, December.
- 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.
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