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Cobb-Douglas preferences under uncertainty

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  • José Faro

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Abstract

This paper axiomatizes Cobb-Douglas preferences under uncertainty. First, we extend the original Trockel (Econ Lett 30:7–10, 1989 )’s axiomatic foundation to a general state space framework based on the Strong Homotheticity Axiom, obtaining also the incomplete case a la Bewley (Decis Econ Financ 25:79–110, 2002 ). We show that this key axiom for the Cobb-Douglas expected utility specification is refuted by Ellsberg’s uncertainty aversion behavioral pattern. Our main result provides a set of meaningful axioms characterizing Cobb-Douglas min-expected utility preferences, an important class of uncertainty averse preferences for studying the consequences of ambiguity in finance and other fields. Finally, we present briefly how to obtain more general representations like the variational case. Copyright Springer-Verlag Berlin Heidelberg 2013

Suggested Citation

  • José Faro, 2013. "Cobb-Douglas preferences under uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(2), pages 273-285, October.
  • Handle: RePEc:spr:joecth:v:54:y:2013:i:2:p:273-285
    DOI: 10.1007/s00199-012-0738-7
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    Cited by:

    1. repec:eee:ecolet:v:157:y:2017:i:c:p:21-23 is not listed on IDEAS
    2. Maria Gabriella Graziano & Claudia Meo & Nicholas C. Yannelis, 2015. "Stable sets for asymmetric information economies," International Journal of Economic Theory, The International Society for Economic Theory, vol. 11(1), pages 137-154, March.
    3. Faro, José Heleno, 2015. "Variational Bewley preferences," Journal of Economic Theory, Elsevier, vol. 157(C), pages 699-729.
    4. Eisei Ohtaki & Hiroyuki Ozaki, 2015. "Monetary equilibria and Knightian uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(3), pages 435-459, August.
    5. Eisei Ohtaki & Hiroyuki Ozaki, "undated". "Optimality in a Stochastic OLG Model with Ambiguity," Working Papers e69, Tokyo Center for Economic Research.

    More about this item

    Keywords

    Cobb-Douglas preferences; Expected utility; Ellsberg paradox; Knightian uncertainty; Incomplete preferences; MEU preferences; D81;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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