Normality under uncertainty

Carlos Eugênio da Costa (carlos.eugenio@fgv.br)

No 496, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: Consider the demand for a good whose consumption be chosen prior to the resolution of uncertainty regarding income. How do changes in the distribution of income affect the demand for this good? In this paper we show that normality, is sufficient to guarantee that consumption increases of the Radon-Nikodym derivative of the new distribution with respect to the old is non-decreasing in the whole domain. However, if only first order stochastic dominance is assumed more structure must be imposed on preferences to guanantee the validity of the result. Finally a converse of the first result also obtains. If the change in measure is characterized by non-decreasing Radon-Nicodyn derivative, consumption of such a good will always increase if and only if the good is normal.

Date: 2003-09-30
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