×

Tractable consumer choice. (English) Zbl 1377.91116

Summary: We present a rational model of consumer choice, which can also serve as a behavioral model. The central construct is \(\lambda\), the marginal utility of money, derived from the consumer’s rest-of-life problem. It provides a simple criterion for choosing a consumption bundle in a separable consumption problem. We derive a robust approximation of \(\lambda\) and show how to incorporate liquidity constraints, indivisibilities, and adaptation to a changing environment. We find connections with numerous historical and recent constructs, both behavioral and neoclassical, and draw contrasts with standard partial equilibrium analysis. The result is a better grounded, more flexible, and more intuitive description of consumer choice.

MSC:

91B42 Consumer behavior, demand theory
PDFBibTeX XMLCite
Full Text: DOI Link

References:

[1] Allen, R. G. D. (1933). On the marginal utility of money and its application. Economica, 40, 186-209. · doi:10.2307/2548766
[2] Bentham, J. (1802). Theory of legislation. Edited by E. Dumont, translated from the original French by C.M. Atkinson in 1914. Oxford: Oxford University Press.
[3] Bernoulli, D. (1738). Specimen theoriae novae de mensura sortis. English translation, “Exposition of a New Theory on the Measurement of Risk”. Econometrica, 22, 23-26. · Zbl 0055.12004
[4] Bewley, T. (1977). The permanent income hypothesis: A theoretical formulation. Journal of Economic Theory, 16, 252-292. · Zbl 0395.90004 · doi:10.1016/0022-0531(77)90009-6
[5] Bewley, T. (2007). General equilibrium, overlapping generations models, and optimal growth theory. Cambridge: Harvard University Press. · doi:10.4159/9780674020924
[6] Biswas, T. (1977). The Marshallian consumer. Economica, 44(173), 47-56. · doi:10.2307/2553548
[7] Bordalo, P., Gennaioli, N., & Shleifer, A. (2013). Salience and consumer choice. Journal of Political Economy, 121(5), 803-843. · doi:10.1086/673885
[8] Brown, D. J., & Calsamiglia, C. (2003). The Strong Law of Demand. Cowles Foundation Discussion Paper No. 1399.
[9] Browning, M. (2005/1985). A working paper from April 1985: Which demand elasticities do we know and which do we need to know for policy analysis? Research in Economics, 59, 293-320.
[10] Browning, M., Deaton, A., & Irish, M. (1985). A profitable approach to labor supply and commodity demands over the life-cycle. Econometrica, 53(3), 503-544. · doi:10.2307/1911653
[11] Cramer, G. (1728). Letter to Nicolas Bernoulli. Reprinted in Bernoulli (1738).
[12] Deaton, A. (1977). Involuntary saving through unanticipated inflation. American Economic Review, 67(5), 899-910.
[13] Deaton, A. (1992). Understanding consumption. Oxford: Clarendon Press. · doi:10.1093/0198288247.001.0001
[14] Dwyer, G. P, Jr, & Lindsay, C. M. (1984). Robert Giffen and the Irish potato. American Economic Review, 44(1), 188-192.
[15] Evans, J. S. B. T., & Frankish, K. (Eds.). (2009). In two minds: Dual processes and beyond. New York: OUP.
[16] Friedman, M., & Savage, L. J. (1948). The utility analysis of choices involving risk. The Journal of Political Economy, 56(4), 279-304. · doi:10.1086/256692
[17] Frisch, R. (1932). New methods of measuring marginal utility. Tubingen: J.C.B Mohr (Paul Siebeck).
[18] Frisch, R. (1959). A complete scheme for computing all direct and cross demand elasticities in a model with many sectors. Econometrica, 27, 177-196. · Zbl 0086.13603 · doi:10.2307/1909441
[19] Genesove, D., & Mayer, C. (2001). Loss aversion and seller behavior: Evidence from the housing market. Quarterly Journal of Economics, 116(4), 1233-1260. · Zbl 1004.91501 · doi:10.1162/003355301753265561
[20] Gennaioli, N., & Shleifer, A. (2010). What comes to mind. Quarterly Journal of Economics, CXXV(4), 1399-1433. · doi:10.1162/qjec.2010.125.4.1399
[21] Hauser, J. R., & Urban, G. L. (1986). The value priority hypotheses for consumer budget plans. Journal of Consumer Research, 12(4), 446-462. · doi:10.1086/208529
[22] Heckman, J. (1974). Life cycle consumption and labor supply: An explanation of the relationship between income and consumption over the life cycle. American Economic Review, 64(1), 88-94.
[23] Herrnstein, R. J., & Prelec, D. (1991). Melioration: A theory of distributed choice. Journal of Economic Perspectives, 5(3), 137-156. · doi:10.1257/jep.5.3.137
[24] Heymann, D., & Leijonhufvud, A. (1995). High Inflation. The Arne Ryde Memorial Lectures. Oxford University Press, Oxford.
[25] Hicks, J. R., & Allen, R. G. D. (1934). A reconsideration of the theory of value. Economica, Part I: 1(1), 52-76. Part II, 1(2), 196-219.
[26] Jensen, R. T., & Miller, N. H. (2008). Giffen behavior and subsistence consumption. American Economic Review, 98(4), 1553-1577. · doi:10.1257/aer.98.4.1553
[27] Kahneman, D. (2011). Thinking. Farrar, Straus and Giroux: Fast and Slow. · Zbl 0395.90004
[28] Knutson, B., Rick, S., Wimmer, G. E., Prelec, D., & Loewenstein, G. (2007). Neural predictors of purchases. Neuron, 53, 147-156. · doi:10.1016/j.neuron.2006.11.010
[29] Love, D. A. (2013). Optimal rules of thumb for consumption and portfolio choice. The Economic Journal, 123(September), 932-961. · doi:10.1111/ecoj.12002
[30] Marshall, A. (1890/1920). Principles of economics. London: Macmillan. · JFM 22.0241.03
[31] Nachbar, J. H. (1998). The last word on Giffen goods? Economic Theory, 11(2), 403-412. · Zbl 0891.90042 · doi:10.1007/s001990050193
[32] Prelec, D., & Loewenstein, G. (1998). The red and the black: Mental accounting of savings and debt. Marketing Science, 17(1), 4-28. · doi:10.1287/mksc.17.1.4
[33] Rabin, M. (2000). Risk aversion and expected-utility theory: A calibration theorem. Econometrica, 68(5), 1281-1292. · doi:10.1111/1468-0262.00158
[34] Read, D., Lowenstein, G., & Rabin, M. (1999). Choice bracketing. Journal of Risk and Uncertainty, 19(1-3), 171-197. · Zbl 0944.91509 · doi:10.1023/A:1007879411489
[35] Sákovics, J. (2013). Revealed cardinal preference. Economic Theory Bulletin, 1(1), 39-45. · doi:10.1007/s40505-013-0006-4
[36] Stanovich, K. E., & West, R. F. (2000). Individual differenves in reasoning: Implications for the rationality debate. Behavioral and Brain Sciences, 23, 645-665. · doi:10.1017/S0140525X00003435
[37] Stigler, G. J. (1950). The development of utility theory. I. Journal of Political Economy, 58, 307-327. · doi:10.1086/256962
[38] Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral Decision Making, 12(3), 183-206. · doi:10.1002/(SICI)1099-0771(199909)12:3<183::AID-BDM318>3.0.CO;2-F
[39] Varian, H. R. (1992). Microeconomic analysis (3rd ed.). New York: W.W. Norton and Co.
[40] von Neumann, J., & Morgenstern, O. (1944). Theory of games and economic behavior. Princeton, NJ: Princeton University Press. · Zbl 0063.05930
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. In some cases that data have been complemented/enhanced by data from zbMATH Open. This attempts to reflect the references listed in the original paper as accurately as possible without claiming completeness or a perfect matching.