THE ROLE OF THE UTILITY FUNCTION IN THE ESTIMATION OF PREFERENCE PARAMETERS

Daria Pignalosa ()

No 235, Departmental Working Papers of Economics - University 'Roma Tre' from Department of Economics - University Roma Tre

Abstract: Within the modern mainstream theory of consumption, the main characteristics of individual preferences are represented by a definite set of parameters: risk aversion, prudence, and the elasticity of intertemporal substitution. To give quantitative definition to each of these parameters is crucial, but the results of the empirical literature are controversial. Among the reasons for this failure, a possible, neglected role may have been played by the need to specify a utility function to perform the estimation. This paper presents a number of simulation exercises, which show that the same saving behaviour can be associated with quite different values of the preference parameters depending on the utility function adopted. The analysis suggests that the research devoted to estimating preference parameters has been affected by the constraints imposed, on the one hand, by the quantitative definition of the parameters, and, on the other, by the utility functions adopted.

Keywords: Consumption; Elasticity of Intertemporal Substitution; Risk Aversion; Precautionary Saving; Utility function (search for similar items in EconPapers)
JEL-codes: D12 D15 D81 (search for similar items in EconPapers)
Pages: 41
Date: 2018-03
New Economics Papers: this item is included in nep-upt
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Journal Article: On the role of the utility function in the estimation of preference parameters (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:rtr:wpaper:0235

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