Revealed Preference Analysis of Expected Utility Maximization under Prize-Probability Trade-Offs

Laurens Cherchye, Thomas Demuynck, Bram De Rock and Mikhail Freer

No 2019-27, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: We provide a revealed preference characterization of expected utility maximization in binary lotteries with prize-probability trade-offs. This characterization applies to a wide variety of decision problems, including first price auctions, crowdfunding games, posted price mechanisms and principal agent problems. We start by characterizing optimizing behavior when the empirical analyst exactly knows either the probability function of winning or the decision maker’s utility function. Subsequently, we provide a statistical test for the case where the utility function is unknown and the probability function has to be estimated. Finally, we consider the situation with both the probability function and utility function unknown. We show that expected utility maximization has empirical content when these functions satisfy log-concavity assumptions. We demonstrate the empirical usefulness of our theoretical findings through an application to an experimental data set.

Keywords: expected utility maximization; prize-probability trade offs; revealed preference characterization; testable implication; experiemental data (search for similar items in EconPapers)
JEL-codes: D00 (search for similar items in EconPapers)
Pages: 53 p.
Date: 2019-11
New Economics Papers: this item is included in nep-gth, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published by:

Downloads: (external link)
https://dipot.ulb.ac.be/dspace/bitstream/2013/2963 ... K_FREER-revealed.pdf Full text for the whole work, or for a work part (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eca:wpaper:2013/296397

Ordering information: This working paper can be ordered from
http://hdl.handle.ne ... lb.ac.be:2013/296397

Access Statistics for this paper

More papers in Working Papers ECARES from ULB -- Universite Libre de Bruxelles Contact information at EDIRC.
Bibliographic data for series maintained by Benoit Pauwels ().