Individual Welfare and the Demand for Financial Instruments

Jehle, Geoffrey (1984): Individual Welfare and the Demand for Financial Instruments. Published in: Southern Economic Journal , Vol. 51, No. No. 1 (July 1984): pp. 116-134.

Abstract

Individuals' demands for financial instruments are derived from a generalized Fisherian intertemporal consumption model. These are expressed in terms of the future value of the borrowing and lending in the initial period of an arbitrary time horizon, and are dependent on their current period prices or discount rates. An exact measure of the influence of these prices on individual welfare is constructed, observable surplus measures are defined which are analogous to ordinary consumer surplus, and the relationship of these observable surplus measures to the theoretically exact measure is specified. It is shown that with proper adaptation and interpretation, the entire spirit and substance of Willig's [11; 12] well-known solution to the problem of estimating individual welfare in ordinary markets can be carried over to the particular type of intertemporal decision-making which gives rise to market demands for financial instruments. Contrary to what appears to be generally presumed, proper observable surplus measures bearing a clear relationship to accepted theoretical measures of individual and social welfare are not properly calculated as simple areas under observable demands for financial instruments. However, it is shown that simple adaptations in the calculation of those areas suffice to enable precise welfare calculations to be made.

• Item Type: MPRA Paper
• Language: English
• Keywords: Welfare, Consumer, Intertemporal,
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; D - Microeconomics > D9 - Intertemporal Choice

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