The Cake-Eating Problem: Non-Linear Sharing Rules

31 Pages Posted: 26 Sep 2012

See all articles by Eugenio Peluso

Eugenio Peluso

University of Verona - Department of Economics

Alain Trannoy

National Center for Scientific Research (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS)

Date Written: September 25, 2012

Abstract

Consider the most simple problem in microeconomics, a maximization problem with an additive separable utility function over bundles of two goods which provide equal satisfaction to an agent. Although simple, this framework allows for a very wide range of applications, from the Arrow-Debreu contingent claims case to the risk-sharing problem, including standard portfolio choice, intertemporal individual consumption, demand for insurance and tax evasion. We show that any Engel curve can be generated through such a simple program and the necessary and sufficient restrictions on the demand system to be the outcome of such a maximisation process. Moreover, we identify three classes of utility function that generate non-linear sharing rules. The gap between the two expenditure shares increases in absolute, average or marginal terms with the total amount of wealth, depending on whether DARA, DRRA and convex risk tolerance are considered. The extension of the different results to the case of more than two goods is provided.

Keywords: Recoverability, cake-eating problem, sharing rules, concavity, convex risk tolerance

JEL Classification: D11, D81, D90, G12

Suggested Citation

Peluso, Eugenio and Trannoy, Alain, The Cake-Eating Problem: Non-Linear Sharing Rules (September 25, 2012). Working Paper Series, Department of Economics, University of Verona 26/2012. Available at SSRN: https://ssrn.com/abstract=2151812 or http://dx.doi.org/10.2139/ssrn.2151812

Eugenio Peluso (Contact Author)

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

Alain Trannoy

National Center for Scientific Research (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) ( email )

54, boulevard Raspail
Paris, 75006
France

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