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Intertemporal Consumption with Risk: A Revealed Preference Analysis

Lanier, Joshua and Miao, Bin and Quah, John and Zhong, Songfa (2018): Intertemporal Consumption with Risk: A Revealed Preference Analysis.

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Abstract

This paper presents a nonparametric, revealed preference analysis of intertemporal consumption with risk. In an experimental setting, subjects allocate tokens over four commodities, consisting of consumption in two contingent states and at two time periods, subject to different budget constraints. With this data, one could test, using Afriat's Theorem and its generalizations, whether a subject's choices are consistent with utility maximization, and also utility maximization with various additional properties on the utility function. Our results broadly support a model where subjects maximize a utility function that is weakly separable across states but there is little support for weak separability across time. Our result sheds light on the source of the failure of the discounted expected utility model.

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