MULTIATTRIBUTE UTILITY THEORY, INTERTEMPORAL UTILITY, AND CORRELATION AVERSION

Convenient assumptions about qualitative properties of the intertemporal utility function have generated counterintuitive implications for the relationship between atemporal risk aversion and the intertemporal elasticity of substitution. If the intertemporal utility function is additively separable,...

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Published inInternational economic review (Philadelphia) Vol. 59; no. 2; pp. 537 - 555
Main Authors Andersen, Steffen, Harrison, Glenn W., Lau, Morten I., Rutström, E. Elisabet
Format Journal Article
LanguageEnglish
Published Philadelphia Wiley Periodicals, Inc 01.05.2018
Blackwell Publishing Ltd
Subjects
Aversion
Economic models
Economic theory
Lotteries
Risk
Risk aversion
Specification
Utility functions
Utility theory
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Summary:Convenient assumptions about qualitative properties of the intertemporal utility function have generated counterintuitive implications for the relationship between atemporal risk aversion and the intertemporal elasticity of substitution. If the intertemporal utility function is additively separable, then the latter two concepts are the inverse of each other. We review a theoretical specification with a long lineage in the literature on multi-attribute utility and use this theoretical structure to guide the design of a series of experiments that allow us to identify and estimate intertemporal correlation aversion. Our results show that subjects are correlation averse over lotteries with intertemporal income profiles.
Bibliography:CEAR Working Paper 2011‐03
available at
http://cear.gsu.edu/papers
We thank the U.S. National Science Foundation for research support under grants NSF/HSD 0527675 and NSF/SES 0616746, the Danish Social Science Research Council for research support under project 275‐08‐0289, and the Carlsberg Foundation under grant 2008‐01‐0410. We also thank two referees, the editor, Antoine Bommier, Anke Leroux, Harris Schlesinger, and seminar participants for many useful comments. Additional appendices are available in
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ISSN:0020-6598
1468-2354
1468-2354
DOI:10.1111/iere.12279