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The Income Effect under Uncertainty: a Slutsky-Like Decomposition with Risk Aversion

Author

Listed:
  • Elena Antoniadou
  • Leonard J. Mirman
  • Marc Santugini

Abstract

We study the effect of changing income on optimal decisions in the multidimensional expected utility framework with strongly separable preferences. Using the Kihlstrom and Mirman (1974) (KM) utility representation, we show that the effect of changing income can be decomposed into a modified income effect linked to the classical income effect and an effect representing attitudes to risk, modified by income.

Suggested Citation

  • Elena Antoniadou & Leonard J. Mirman & Marc Santugini, 2013. "The Income Effect under Uncertainty: a Slutsky-Like Decomposition with Risk Aversion," Cahiers de recherche 1306, CIRPEE.
  • Handle: RePEc:lvl:lacicr:1306
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    References listed on IDEAS

    as
    1. Kihlstrom, Richard E. & Mirman, Leonard J., 1974. "Risk aversion with many commodities," Journal of Economic Theory, Elsevier, vol. 8(3), pages 361-388, July.
    2. Louis Eeckhoudt & Béatrice Rey & Harris Schlesinger, 2007. "A Good Sign for Multivariate Risk Taking," Management Science, INFORMS, vol. 53(1), pages 117-124, January.
    3. Saku Aura & Peter Diamond & John Geanakoplos, 2002. "Savings and Portfolio Choice in a Two-Period Two-Asset Model," American Economic Review, American Economic Association, vol. 92(4), pages 1185-1191, September.
    4. Agnar Sandmo, 1977. "Portfolio Theory, Asset Demand and Taxation: Comparative Statics with Many Assets," Review of Economic Studies, Oxford University Press, vol. 44(2), pages 369-379.
    5. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
    6. Sandmo, Agnar, 1969. "Capital Risk, Consumption, and Portfolio Choice," Econometrica, Econometric Society, vol. 37(4), pages 586-599, October.
    7. Davis, George K, 1989. "Income and Substitution Effects for Mean-Preserving Spreads," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 131-136, February.
    8. Menezes, Carmen F. & Henry Wang, X. & Bigelow, John P., 2005. "Duality and consumption decisions under income and price risk," Journal of Mathematical Economics, Elsevier, vol. 41(3), pages 387-405, April.
    9. Leonard Mirman & Marc Santugini, 2014. "On risk aversion, classical demand theory, and KM preferences," Journal of Risk and Uncertainty, Springer, vol. 48(1), pages 51-66, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Classical Demand Theory; Consumption-Saving Problem; Income; Risk Aversion; Uncertainty;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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