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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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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
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Handle: RePEc:ssb:dispap:431
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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. Smith, Vernon L, 1985. "Experimental Economics: Reply," American Economic Review, American Economic Association, vol. 75(1), pages 264-72, March.
  4. 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.
  5. Dagsvik, John k: & Strøm, Steinar, 2003. "A Stochastic Model for the Utility of Income," Memorandum 32/2003, Oslo University, Department of Economics.
  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. Gerard Debreu, 1957. "Stochastic Choice and Cardinal Utility," Cowles Foundation Discussion Papers 39, Cowles Foundation for Research in Economics, Yale University.
  8. Daniel McFadden, 1977. "Modelling the Choice of Residential Location," Cowles Foundation Discussion Papers 477, Cowles Foundation for Research in Economics, Yale University.
  9. 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.
  10. 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.
  11. Van Praag, Bernard, 1971. "The welfare function of income in Belgium: An empirical investigation," European Economic Review, Elsevier, vol. 11(3), pages 337-369.
  12. Kapteyn, Arie & Wansbeek, Tom, 1985. "The individual welfare function : A review," Journal of Economic Psychology, Elsevier, vol. 6(4), pages 333-363, December.
  13. 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.
  14. Van Herwaarden, Floor G. & Kapteyn, Arie, 1979. "Empirical comparison of the shape of welfare functions," Economics Letters, Elsevier, vol. 3(1), pages 71-76.
  15. Seidl, Christian, 1994. "How sensible is the Leyden individual welfare function of income?," European Economic Review, Elsevier, vol. 38(8), pages 1633-1659, October.
  16. Van Praag, B.M.S., 1989. "The Relativity of the Welfare Concept," Research Paper 69, World Institute for Development Economics Research.
  17. Buyze, Jeannine, 1982. "The estimation of welfare levels of a cardinal utility function," European Economic Review, Elsevier, vol. 17(3), pages 325-332.
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