Can the Friedman-Savage case be due to the cost of information?
TL;DR: In this paper, it was suggested that the peculiar behavior of VNM utility function in the Friedman-Savage case could be explained by introducing the cost of information into our calculation.
About: This article is published in Mathematical Social Sciences.The article was published on 1985-06-01. It has received 1 citations till now. The article focuses on the topics: Isoelastic utility & Transferable utility.
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TL;DR: In this article, a simple model of labor supply with additively separable utility over income and leisure is employed, and the sub-utility function for income is of the Friedman-Savage type, exhibiting preferences that alternate between increasing and diminishing marginal utility of income.
Abstract: Purpose – Some labor supply curves exhibit inflection points at which they bend backward or fall forward; thus, some workers alternate between increasing and decreasing their labor hours as wages increase. No consensus has yet been reached on the underlying motive for such behavioral inconsistencies. This paper aims to develop a unified theory to explain each of these variations in labor supply. Design/methodology/approach – The author employs a simple model of labor supply with additively separable utility over income and leisure. The sub-utility function for income is of the Friedman-Savage type, exhibiting preferences that alternate between increasing and diminishing marginal utility of income. Findings – Labor supply curves slope downward where relative risk aversion is strong, and upward where relative risk aversion is weak or negative. Thus, utility functions with inflection points can form the basis of labor supply curves with inflection points. Research limitations/implications – Friedman-Savage u...
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TL;DR: In this paper, the authors suggest that an important class of reactions of individuals to risk can be rationalized by a rather simple extension of orthodox utility analysis, i.e., individuals frequently must, or can, choose among alternatives that differ, among other things, in the degree of risk to which the individual will be subject.
Abstract: T vHE purpose of this paper is to suggest that an important class of reactions of individuals to risk can be rationalized by a rather simple extension of orthodox utility analysis. Individuals frequently must, or can, choose among alternatives that differ, among other things, in the degree of risk to which the individual will be subject. The clearest examples are provided by insurance and gambling. An individual who buys fire insurance on a house he owns is accepting the certain loss of a small sum (the insurance premium) in preference to the combination of a small chance of a much larger loss (the value of the house) and a large chance of no loss. That is, he is choosing certainty in preference to uncertainty. An individual who buys a lottery ticket is subjecting himself to a large chance of losing a small amount (the price of the lottery ticket) plus a small chance of winning a large amount (a prize) in preference to avoiding both risks. He is choosing uncertainty in preference to certainty.
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