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Fanning-Out or Fanning-In? Continuous or Discontinuous? Estimating Indifference Curves Inside the Marschak-Machina Triangle using Certainty Equivalents.

Kontek, Krzysztof (2015): Fanning-Out or Fanning-In? Continuous or Discontinuous? Estimating Indifference Curves Inside the Marschak-Machina Triangle using Certainty Equivalents.

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Abstract

This paper introduces a new method of estimating indifference curves in the Marschak-Machina triangle. The method involves posing questions about indifference. Contrary to previous attempts, where subjects were required to identify those lotteries to which they were indifferent vis-à-vis a given lottery, the subjects are here required to determine its certainty equivalent. The procedure is repeated for a large number of lotteries inside the triangle. Simple, linear interpolation of certainty equivalent values between adjacent points representing the lotteries under consideration allows any indifference curve inside the triangle to be plotted. The experimental results presented in the paper shed new light on the shape of indifference curves inside the Marschak-Machina triangle, where curve parallelism, fanning-out, fanning-in and boundary effects, including (possibly discontinuous) jumps, are all common. As shown, those decision-making models, which can predict jumps on the triangle legs, offer the best econometric fit of the indifference curves obtained in the study.

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