Marginal Utility Of Money Research Articles

Experimental quantity, mental budgeting and food choice: a discrete choice experiment application

Abstract Food discrete choice experiments typically define product alternatives with a researcher-predetermined and sometimes arbitrary quantity. Results reveal that the use of a researcher-prespecified experimental quantity leads to biased welfare estimates. Differences in marginal utility of money are found with a resulting upward bias in willingness to pay estimates when small pre-defined product quantities are used. Higher-income consumers show more evident bias. This evidence cautions the use of a researcher-predetermined quantity to design alternatives in choice tasks and also proposes an alternative experimental design that accounts for these effects by matching the quantity in experiments to consumer’s actual purchase quantity.

Obstacles to Redistribution Through Markets and One Solution

Dworczak et al. (2021) study when certain market structures are optimal in the presence of heterogeneous preferences. A key assumption is that the social planner knows the joint distribution of the value of the good and marginal value of money. This paper studies whether relevant features of this distribution are identified from choice data. We show that the features of the distribution needed to characterize optimal market structure cannot be identified when demand is known for all prices. While this is a negative result, we show that the distribution of good value and marginal utility of money is fully identified when there is an observed measure of quality that varies. Thus, while Dworczak et al. (2021) abstract from quality, we show how including quality is crucial for potential applications.

Obstacles to Redistribution Through Markets and One Solution

Dworczak et al. (2021) study when certain market structures are optimal in the presence of heterogeneous preferences. A key assumption is that the social planner knows the joint distribution of the value of the good and marginal value of money. This paper studies whether relevant features of this distribution are identified from choice data. We show that the features of the distribution needed to characterize optimal market structure cannot be identified when demand is known for all prices. While this is a negative result, we show that the distribution of good value and marginal utility of money is fully identified when there is an observed measure of quality that varies. Thus, while Dworczak et al. (2021) abstract from quality, we show how including quality is crucial for potential applications.

Price stabilization or income support? Preferences and cost of programmes

Purpose Over the past 25 years, direct cash transfers (often abbreviated as direct benefit transfer, DBT) to the poorer section of the society are gaining popularity over explicit subsidization of prices of essential commodities. One of the main arguments in favor of DBT is that it will cost the government less money and yet, the consumer benefit will be high. This paper aims to examine the proposition critically. Removal of price support exposes the consumers to market risk, and any income support programme must compensate the consumers accordingly. Design/methodology/approach The authors use a theoretical study where the model of a representative consumer under different specification of preferences is used to compare programme costs under price stabilization and income support programmes. Findings What the authors show in the paper that the comparative cost of the programmes crucially depends on the nature of preferences, as well as the good under question. For certain specifications of the indirect utility function and the marginal utility of money, one programme may cost less than the other. Any policymaker must take account of such nuances before making a blanket prescription. Research limitations/implications The main limitation is that only a representative consumer is taken. Practical implications The specification of indirect utility function plays a decisive role in deciding, which one these two policies, DBT or stabilizing price at a fixed level. Originality/value The main novelty of the paper is in the different specifications of the indirect utility function considered in the paper.

Contact Heterogeneity as a Mediator of the Relationship between Social Class and Altruistic Giving

Research on the relationship between social class and altruistic giving has provided inconsistent evidence. Using the dictator game, in which one participant is endowed with a certain amount of money and has to allocate this amount between herself and another individual, several studies found that higher-class actors have a lower tendency toward altruistic giving than lower-class actors; other studies found the opposite pattern. We show that social class has a positive effect on altruistic giving in the dictator game with a sizeable sample of residents of the United States using both an objective measure of social class—that is, a composite of income, education, and occupational prestige—and a subjective measure. Shedding more light on the mechanisms underlying the positive effect of social class, it is demonstrated that class affects altruistic giving not so much by differences in empathic concern but by differences in the marginal utility of money and contact heterogeneity. It is argued that the latter effect can be derived from Collins’s theory of interaction rituals and class cultures.

Risk Aversion: The Need for Behavioral Explanation(s)

Expected utility theory (EUT) is a parsimonious theory that explains behavior under risk and uncertainty. Previous research showed that EUT of wealth is not a satisfactory explanation of risk aversion. We use empirical data from a controlled laboratory experiment to show that EUT of income cannot explain risk aversion either. The experimental data suggests that the marginal utility of money would decrease at an absurdly high rate if the concavity of Bernoulli utility function is used to explain risk aversion. We demonstrate that loss aversion together with probability weighting explain the observed risk aversion well. Unlike many previous studies, we elicit valuations-Willingness to Pay (WTP) and Willingness to Accept (WTA)-for risky prospects to make the reference points more salient. Using an empirical model that features reference-dependent preference, we further show that our identi cation is robust to changes in reference points. The obtained parameters from estimating the structural model are consistent with literature.

Gain and loss of money in a choice experiment. The impact of financial loss aversion and risk preferences on willingness to pay to avoid renewable energy externalities

We examine how the direction of price changes affects the value people place on avoiding renewable energy externalities in Poland. Additionally, we investigate the influence of individuals' financial loss aversion and financial risk preferences on this valuation. In our study we conduct a choice experiment survey in which respondents' choices indicate the value they place on avoiding wind, solar, and biomass externalities. We combine this survey with a financial lottery choice task that elicits the respondents' risk preferences and degree of loss aversion. In the choice experiment we use both increases and decreases in electricity bills to depict the uncertain effect of new sources of energy generation on the current price level. This design allows us to investigate if obtained values are independent of the payment mechanism. In the analyzed context, our results indicate that marginal utility of money seems to be lower with a rebate on the energy bill than with a surcharge. We find that financial risk preferences affect people's choices both in a case of a surcharge and a rebate, while loss aversion for money affects them just in the case of a rebate. Loss aversion for money seems to not be present during a buying process. The results indicate that the more risk seeking people are in a financial domain the more they are willing to pay for proposed changes in renewable energy development, at the same time people who are more risk averse require less compensation before they accept externalities from renewable electricity production. Moreover, a higher compensation is required by people who are more loss averse with regard to money.

Does the Income Tax Cause Parents to Spend Too Much Time with Their Children?: Rethinking Mirrlees

In 1971, James Mirrlees published “An Exploration in the Theory of Optimum Income Taxation,” one of the most influential tax papers ever written. Unpacked, Mirrlees’ claim can be restated as follows: Assume that our undistorted decisions about how to allocate our time between paid and unpaid activities are welfare-maximizing. If so, any distortion of those decisions by the tax system is welfare-reducing. Unless the supply of labor is inelastic or income effects predominate, taxing income from labor will cause taxpayers to spend less time engaged in paid activities and more time in unpaid activities than would be welfare-maximizing. Because of the declining marginal utility of money, redistribution from high-income to low-income individuals is generally welfare-enhancing. Nevertheless, at some point the welfare losses from taxing labor income to effect redistribution outweigh the welfare gains produced by redistribution. This, in turn, (1) limits the overall amount of welfare-enhancing redistribution we can effect by taxing income from labor and (2) requires flat or declining marginal tax rates on such income. Stated in the abstract, the claim is plausible enough to have persuaded important segments of the tax and tax economic academy. In the intervening 40 years, however, empirical evidence has come to suggest that the claim is strongest when applied to parents, especially mothers, with young children – the one economically significant group that consistently demonstrates elastic responses to labor taxation. Survey data establishes that a very large portion of the unpaid time spent by American parents of children age 12 or younger – both fathers and mothers – is spent on the care of their own children. If taxes cause parents to spend more time on unpaid activities, therefore, they almost certainly cause parents to spend more time with their children. Any such behavioral distortion is, by hypothesis, welfare-reducing. As to parents, therefore, optimal tax theory’s claim is that progressive taxation causes parents to spend too much time with their children. At the very least, optimal tax theorists must be comfortable with the possibility that this is effectively their claim. But is the claim true? This paper approaches the question from within the standard preference-satisfaction utilitarian paradigm, using standard tax economic arguments – the perspective most sympathetic to the claim. Specifically, it focuses on two of the many assumptions Mirrlees used to make his mathematics tractable. First, he assumed that utility is absolute, not relative – that our utility curves do not depend on how much anyone else has. Second, he assumed that supply curves for consumption goods are similarly fixed and exogenous. In the case of parents, especially mothers, with young children, both assumptions are probably false. But if this is so, insufficiently progressive taxes may cause parents to spend too little time with their children. And if so, Mirrlees’ computations cannot be taken to be even provisionally correct, even within the welfarist paradigm. The paper then turns to the problem of GDP maximization – a goal regularly confused with that of welfare maximization. GDP maximizers rely heavily on the empirical literature Mirrlees’ paper triggered to argue that high top marginal rates trigger labor-leisure substitution. They then assume, generally without further evidence, that the substitution of leisure for labor by high-income taxpayers reduces GDP growth. Happily, the Reagan tax cuts tested this assumption nicely – advocates promised that those cuts would boost GDP growth. Contrary to predictions, however, average U.S. GDP growth declined in the decades after the Reagan cuts. The reasons are unclear. What this does mean, however, is that the Mirrlees literature cannot by itself be read to support the proposition that high marginal rates reduce GDP growth. And this, in turn, means that the constraints it imposes on real-world policymaking are much less significant than is commonly assumed.

The Marshallian Demand Theory Revisited

Did Alfred Marshall assume compensated or uncompensated demand curve? I argue that neither: I show that the Marshallian demand curve is the willingness-to-pay curve derived under the assumption of all prices and income held constant. This curve approximates both compensated and uncompensated demand curves only under a specific condition assumed by Marshall, namely that expenditure on the good in question represents a negligible part of a consumer’s budget. This very condition also implies quasi-constancy of marginal utility of money. I maintain that Marshall had in mind quasi-constancy in this sense instead of quasilinearity of utility as is often claimed. I argue that my interpretation provides more accurate account of the Marshallian demand theory than do alternative interpretations.

Smooth preferences, symmetries and expansion vector fields

Tyson (J Math Econ 49(4): 266–277, 2013) introduces the notion of symmetry vector field for a smooth preference relation, and establishes necessary and sufficient conditions for a vector field on consumption space to be a symmetry vector field. The structure of a such a condition is discussed on both geometric and economic grounds. It is established that symmetry vector fields do commute (i.e. have vanishing Lie bracket) for additive and joint separability. The marginal utility of money is employed as a normalization of the expansion vector field (Mantovi, J Econ 110(1): 83–105, 2013) which results in the fundamental (expansion-) symmetry vector field. Finally, a characterization of symmetry vector fields is given in terms of their action on the distance function, and a pattern of complete response is discussed for additive preferences. Examples of such constructions are explicitly worked out. Potential implications of the results are discussed.

Tractable consumer choice

We present a rational model of consumer choice, which can also serve as a behavioral model. The central construct is $$\lambda $$ , the marginal utility of money, derived from the consumer’s rest-of-life problem. It provides a simple criterion for choosing a consumption bundle in a separable consumption problem. We derive a robust approximation of $$\lambda $$ and show how to incorporate liquidity constraints, indivisibilities, and adaptation to a changing environment. We find connections with numerous historical and recent constructs, both behavioral and neoclassical, and draw contrasts with standard partial equilibrium analysis. The result is a better grounded, more flexible, and more intuitive description of consumer choice.

What explains consumption and money holding in the very short-run?: evidence from checking account data

This article investigates consumption and money-holding behaviour within an intertemporal optimization model of the individual household. Our data set consists of deposits and withdrawals from individual household checking accounts that received pay cheques by direct deposit. We construct samples of panel data for households with weekly, biweekly and semi-monthly pay periods and form two different measures of consumption. Generalized Method of Moments estimates of structural parameters provide limited evidence for habit formation or durability. The results indicate small but positive marginal utility of money within a well-behaved utility function, with ‘rule of thumb’ consumption a close approximation. These findings are uniform for sub-samples split according to household age or income.

How do households choose quality and time to replacement for a rapidly improving durable good?

Many durable goods, particularly in the high technology sector of the economy, experience rapid quality improvement. As a result, replacement is typically due to obsolescence rather than breakdown, and replacement cycles are relatively short. When these goods are vertically differentiated, consumers must make two important, inter-related choices upon making a purchase: what quality level to buy, and how long to wait between purchases. In this paper, we analyze how these two decisions relate to underlying preferences and to each other both theoretically and empirically. We demonstrate how a single, tenuous assumption in a commonly used theoretical model can drive the relationships we would predict when we take this model to the data. This highlights the necessity of a more direct empirical analysis. In our empirics, we show that quality choice and replacement cycle length (RCL) are generally positively correlated. We also find evidence of non-monotonic relationships between quality choice and marginal utility of quality and RCL choice and marginal utility of money. That is, households who value quality more don't always buy higher-quality PCs, and households who value money less don't always buy more frequently, ceteris paribus. Our results provide new insights into the nature of durable goods demand, the proper characterization of markets and market segments, and welfare measures.

INFLATION AND THE PUBLIC DEFICIT WHEN THE UTILITY OF MONEY IS INSATIABLE

When the marginal utility of money is positive even at very high levels of the asset (Yoshiyasu Ono’s, 1994, assumption), the relationship between inflation and the public deficit at full employment may result in a unique perverse equilibrium where higher deficits reduce inflation. If there are two equilibria, the low inflation equilibrium is one where the perverse effect between inflation and the public deficit prevails; while in the high inflation equilibrium higher public deficits increase inflation. These results contrast sharply with traditional results found in the literature.

How Do Households Choose Quality and Time to Replacement for a Rapidly Improving Durable Good?

Many durable goods, particularly in the high technology sector of the economy, experience rapid quality improvement. As a result, replacement is typically due to obsolescence rather than breakdown, and replacement cycles are relatively short. When these goods are vertically differentiated, consumers must make two important, inter-related choices upon making a purchase: what quality level to buy, and how long to wait between purchases. In this paper, we analyze how these two decisions relate to underlying preferences and to each other both theoretically and empirically. We demonstrate how a single, tenuous assumption in a commonly used theoretical model can drive the relationships wed predict when we take this model to the data. This highlights the necessity of a more direct empirical analysis. In our empirics, we show that quality choice and replacement cycle length (RCL) are generally positively correlated. We also find evidence of non-monotonic relationships between quality choice and marginal utility of quality and RCL choice and marginal utility of money. That is, households who value quality more dont always buy higher-quality PCs, and households who value money less dont always buy more frequently, ceteris paribus. Our results provide new insights into the nature of durable goods demand, the proper characterization of markets and market segments, and welfare measures.

The design of an optimal insurance contract for irreplaceable commodities

This paper discusses optimal insurance contract for irreplaceable commodities. To describe the dual impacts on individuals when a loss occurs to the insured irreplaceable commodities, we use a state-dependent and bivariate utility function, which includes both the monetary wealth and sentimental value as two arguments. We show that over (full, partial) insurance is optimal when a decrease in sentimental value will increase (not change, decrease, respectively) the marginal utility of monetary wealth. Moreover, a non-zero deductible exists even without administration costs. Furthermore, we demonstrate that a positive fixed reimbursement is optimal if (1) the premium is actuarially fair, (2) the monetary loss is a constant, and (3) the utility function is additively separable and the marginal utility of money is higher in the loss state than in the no-loss state. We also characterize comparative statics of fixed-reimbursement insurance under an additively separable preference assumption.

Walrasian General Equilibrium and Nonlinear Dynamics

Investigations of the structural stability of the general equilibrium model show that within a nonlinear framework, the differential equation governing price adjustment requires two conditions: (a) The number of agents must be greater than or equal to the number of commodities; and (b) severe restrictions on the nature of preferences must be placed. These restrictions are the same as the restrictions on preferences that are required by Chipman and Moore (1980) in order to obtain an exact and an invariant measure of consumer surplus, which is the measure and standard of value in neoclassical economics. When the Chipman-Moore conditions are examined, it is clear that the required restrictions on preferences can also be understood as requiring the constancy of the marginal utility of money, either with respect to all prices (homothetic preferences), or with respect to income and all prices except the numeraire commodity (parallel preferences). The constancy of the marginal utility between the rich and the poor implies an unintended interpersonal comparison of utility. This makes the theory of value rather special, and has implications for much applied work such as benefit-cost analysis or other social decision-making, which requires a general theory of value. It is the utilitarian formulation of welfare, which by definition means that only utility information is taken into account, that leads to the restrictive theory of value. Consequently, avoiding utilitarianism requires an approach to social choice theory that takes other information about well-being into account in social decision-making.

TIME, MONEY, AND OPTIMAL CRIMINAL PENALTIES

The economic approach to optimal criminal penalties measures the welfare effects of crime and punishment in dollar terms, ignoring differences in the marginal utility of money among people. This paper alternatively proposes using time as the unit of measure in determining optimal criminal penalties, measuring the costs and benefits of crime in hours or days instead of dollars. The policy implications differ substantially from those in the existing economic literature. Equal prison terms impose similar time costs on all individuals rather than being more costly for those with higher foregone earnings. Equal fines impose the same cost on all individuals in the dollar‐based economic models but in a time‐denominated system are costlier to those who require more time to earn the money to pay the fines. In principle, one can use either money or time in setting penalties. However, time‐based penalties are more consistent with the fundamental and widely held principles of justice on which the U.S. legal system rests.

Perception of Product Quality in a Static State Utility Model

The role of the consumer′s perception of product quality within the traditional economic utility model is examined. It is argued that by holding marginal utility to be equal among buyers, price reference will be defined specific to the buyer′s marginal utility of money. Price is “understood” by the buyer in terms of perceived quality. The article proceeds to discuss an actual price quantity relationship – implied by the theory – the price quantity data were researched from the theatre market.

Can a time-varying risk premium explain excess returns in the forward market for foreign exchange?

We investigate the existence of a time-varying risk premium in the foreign exchange market using the intertemporal asset pricing model. In this model the risk premium is due to consumption risk, which is measured by the covariance between returns and the marginal utility of money. We model this conditional covariance using Engle's (1982) ARCH model. Results are presented for three exchange rates for the 1975–1985 period. Although a time-varying risk premium is an important determinant of the expected returns, tests of IAPM restrictions show that a more flexible specification of the model is needed.