Homothetic preferences and community excess demand functions

It has recently been shown that microeconomic theory imposes almost no restriction on community excess demand functions besides Walras' Law, if the economy contains no more commodities than consumers.It is shown that the same result is true if the preferences of the consumers are further restricted by the seemingly strong requirement that they be homothetic, even when the distribution of initial endowments is a set of independent points in commodity space fixed in advance except for a scaling factor which is common to all consumers.     

Consumer preferences,the demand for Divisia money,and the welfare costs of inflation

This paper uses neoclassical demand theory to calculate the welfare costs of inflation. It considers the demand interactions between money, consumption goods, and leisure, relaxes the assumption of fixed consumer preferences, and addresses the inter-related problems of estimation of money demand functions, instability of money demand relations, and monetary aggregation. It makes full use of the relevant economic theory and econometrics and generates inference in terms of long-run welfare costs of inflation that is internally consistent with the data and models used.     

Expected utility maximization and demand behavior

This paper extends the non-parametric approach to consumer demand analysis to the case of expected utility maximization. We provide necessary and sufficient conditions for a set of price-quantity pairs to be consistent with expected utility maximization, and investigate their relationship to revealed preference conditions. Extensions to incomplete markets and intertemporal resolution of uncertainty are also considered.     

Expressed preferences and behavior in experimental games

Participants in experimental games typically can only choose actions, without making comments about other participants' future actions. In sequential two-person games, we allow first movers to express a preference between responder choices. We find that responder behavior differs substantially according to whether first movers express a hope for favorable or unfavorable treatment. Responders largely ignore first movers' expressed preferences for favorable responses, however, when the first movers misbehave. As in earlier experiments without preference expression, subjects assign a high positive weight to another person's payoffs when ahead and misbehavior elicits a strong negative response. Logit regressions estimate the weight placed on another (non-misbehaving) person's payoffs to be positive, even when one is behind. There is suggestive evidence that positive reciprocity is enhanced when a preference for favorable treatment is expressed.     

Adam Smith,scientist and evolutionist: modelling other-regarding behavior without social preferences

In this essay, I want to illustrate the power of Sentiments to bring order to contemporary experiments where the traditional game-theoretic models failed decisively to predict human action even under the conditions of anonymity. Sentiments is about sympathy, an undefined primitive human characteristic known and identified through the work it does in enabling the emergence of the human capacity for fellow feeling (in: Smith (ed) The theory of moral sentiments, Oxford, Oxford University Press, p. 10, 1759). Fellow feeling provides the experiential foundation for our rule-following conduct, and constitutes the evolutionary basis for human sociality. Similarly, gravity in Newtonian physics was a primitive concept known by the work it does in governing the orderly motion of all bodies in the observable universe, as it was known in Newton’s time. Both systems sought to explain and understand observations by means of postulated forces at work in nature, but insensible to human awareness.     

The constant preferences assumption as a specification error in demand analysis

Complete demand systems often are estimated under the assumption that preferences are constant. If preferences do change in reality, this leads to a specification error. This note explores some of the implications of such a specification error.     

Adaptive habit persistence in a system of demand equations

The LES has desirable properties as a tool to analyze consumer expenditure patterns. It is a system to equations permitting the researcher to deal with expenditure categories. The model is based upon the habit persistence of consumers. This model has its analytical foundation in the theory of consumer behavior, and it provides an excellent fit to the consumption data.Two modifications of the LES were combined and incorporated into the model. Previous studies treated these modifications separately. The modifications allow for systematic changes over time in the status quo expenditures and the allocation proportions.Estimations of the model utilized a generalized least squares iteration procedure. The results were consistent with theoretical considerations and provided estimates of consumer sensitivity to income and price changes in all expenditure categories considered.Clothing and shoes have the highest habit persistence proportion followed by housing and durables of surplus funds were identified. These changes in consumer behavior indicate a growing share of funds being allocated to durables. Food and beverage, clothing and shoes, and transportation have experienced declines in their allocation proportions. No significant change in housing is observed.     

Adaptive learning models of consumer behavior

In a model of dynamic duopoly, optimal price policies are characterized assuming consumers learn adaptively about the relative quality of the two products. A contrast is made between belief-based and reinforcement learning. Under reinforcement learning, consumers can become locked into the habit of purchasing inferior goods. Such lock-in permits the existence of multiple history-dependent asymmetric steady states in which one firm dominates. In contrast, belief-based learning rules must lead asymptotically to correct beliefs about the relative quality of the two brands and so in this case there is a unique steady state.     

Evolution, bargaining, and time preferences

I include a role for time preferences within a version of the Young (J Econ Theory 59:145–168, 1993b) evolutionary model of bargaining. With or without time preferences, the stochastic stable convention yields a generalized version of the Nash (Econometrica 18:155–162, 1950) Bargaining Solution. When time preferences are added to the model, agents’ discount factors enter into the stochastically stable convention in a natural manner. That is, an agent’s discount factor acts as a bargaining weight within the Nash Bargaining Solution. By taking appropriate limits, an evolutionary foundation for the Rubinstein (Econometrica 50:97–110, 1982) Bargaining Solution is provided. I thank Lew Evans, Jack Leach, Collin Starkweather, Aaron Strong, a referee and associate editor. All errors are my own.     

Skewed background risks and higher-order risk preferences: prudent versus temperate behavior

In recent economic experiments, lotteries with left-skewed background risks elicit more prudent choices than lotteries with right-skewed background risks. In this letter, we use an expected utility framework to show that a skewed zero-mean background risk may induce not only prudent but also temperate behaviour. We suggest that the experimental findings could also be due to temperance, rather than merely to prudence.     

A general revealed preference theorem for stochastic demand behavior

Summary. We present a general revealed preference theorem concerning stochastic choice behavior by consumers. We show that, when the consumer spends her entire wealth, the Weak Axiom of Stochastic Revealed Preference due to Bandyopadhyay, Dasgupta, and Pattanaik (1999) is equivalent to a restriction on stochastic demand behavior that we call stochastic substitutability. We also show that the relationship between the Weak Axiom of Revealed Preference and Samuelson's inequality in the deterministic theory, and the main result of Bandyopadhyay, Dasgupta, and Pattanaik (1999) are both special cases of our result.Received: 10 September 2001, Revised: 4 April 2003, JEL Classification Numbers: D11. Correspondence to: Prasanta K. PattanaikOur greatest debt is to the referee of this paper, who made numerous helpful suggestions. We thank Robin Cubitt, Kunal Sengupta and seminar audiences at Jawaharlal Nehru University, Indian Statistical Institute, University of East Anglia, Universidad Carlos III, University of Essex and University of Montreal for their helpful comments. Prasanta K. Pattanaik acknowledges his intellectual debt to Salvador Barbera, Tapas Majumdar and Amartya Sen.     

On the boundary behavior of the excess demand function

I revisit thoroughly the standard boundary behavior satisfied by the excess demand function of a competitive economy, and I prove two implications of the boundary behavior. Then, I show that these implications lead to an alternative proof of the existence of competitive equilibria which is instructive, shorter and perhaps easier than the available proofs in the literature.     

Present-biased preferences,self-awareness and shirking

We model a mechanism design problem in which the principal owns a project that requires work effort by an agent, but agents may have time-inconsistent, present-biased preferences and lack complete self-awareness of these preferences. The self-control problem and naïveté of an agent may lead him to agree to a contract but later shirk or slack-off, even though doing so is observable. When the principal cannot severely punish shirking and agents are completely naïve, the second-best solution entails allowing a present-biased agent to slack-off in order to avoid a greater loss due to shirking. With greater self-awareness among present-biased agents, the principal may do better by screening some from accepting the contract. Furthermore, when shirking can be severely punished, this does not lead to contracts that eliminate effects of the self control problem. Instead the principal may exploit present-biased agents by offering a contract that allows them to slack-off (which agents fail to foresee they will choose to do) but at the expense of foregoing much compensation.     

Variety,growth and demand

A dynamic model of demand compatible with a changing composition of the economic system is presented in this paper. Consumers are not expected to have completely formed preferences for radically new objects of consumption. Consumers adopt new goods or services ,created by innovation, only if three barriers are overcome: 1) a critical (minimum) level of income, 2) critical human capital, 3) critical fitness. However, even a new good or service with a fitness higher than that of pre-existing ones, will not be immediately adopted. Consumers'.limited knowledge will slow down the rate of adoption of any new good or service.     

Group membership,team preferences,and expectations

Group membership is a powerful determinant of social behaviour in a variety of experimental games. Its effect may be channelled primarily via the beliefs of group members, or directly change their social preferences. We report an experiment with a prisoner's dilemma with multiple actions, in which we manipulate players’ beliefs and show that group identity has a consistent positive effect on cooperation only when there is common knowledge of group affiliation. We also test the robustness of the minimal group effect using three different manipulations: one manipulation fails to induce group identity, and we observe an unsystematic effect of group membership when knowledge of affiliation is asymmetric.     

Consumption,preferences, and the evolutionary agenda

The purpose of this paper is to provide a preliminary evolutionary account of preferences, consumption and demand. This is particularly relevant for the study of innovation which offers consumers the opportunity to develop new behaviours. The paper approaches this question in two stages. First it recognises the importance of time as well as income constraints on consumer behaviour. Secondly, it develops a behavioural approach to consumption routines in terms of Herrnstein's concept of meloriation. In this account the focus is upon activities for which commodities and time are inputs and, with innovation, time is rescheduled on many fronts. Consumer learning is related to a replicator dynamic process. It is shown how changes in wages, prices and the time required to consume influence the demand for activities.     

The theory of rational random behavior and its application to demand analysis

The author's theory of rational random behavior is developed, which distinguishes between the planning and the implementation stage of the decision-maker. Under the assumption of a quadratic loss function and decision variables with an unrestricted range, that theory implies normally distributed disturbances of behavioral equations with a covariance matrix that is known up to a scalar multiple. Those results have to be extended asymptotically by Barbosa for restricted decision variables and a more general loss function. The approach is applied to both the Rotterdam and the linear expenditure demand models: using U.S. postwar data for the former, the author finds that a likelihood ratio test accepts the theory at the 10 percent significance level.     

Recursive preferences,learning and large deviations

We estimate the relative contribution of recursive preferences versus adaptive learning in accounting for the tail thickness of price–dividends/rents ratios. We find that both of these sources of volatility account for volatility in liquid (stocks) but not illiquid (housing) assets.     

Live and let live type behavior in a multi-market setting with demand fluctuations

This paper formalizes a cooperative mode of behavior which captures essential elements of the live and let live philosophy, and shows that adoption of such a policy tends to benefit firms in oligopolistic markets. It is indicated that multiplicity of contacts and exposure to demand fluctuations may simplify coordination and enhance the potential and profitability of live and let live type behavior.