Mono-Linearity-Based Axiomatic Approach to Non-Linear Expected Utility

45 Pages Posted: 13 Nov 2013

See all articles by Xi-Ren Cao

Xi-Ren Cao

Shanghai Jiao Tong University (SJTU)

Xiangwei Wan

Shanghai Jiao Tong University - Antai College of Economics & Management

Date Written: November 12, 2013

Abstract

In this paper, we study the theory of preference over unbounded random prospects using an axiomatic approach. We first show that Yaari's dual independence axiom can be decomposed into two axioms, the homogeneity axiom and the co-monotonic independence with respect to addition axiom, and we determine the representational form using the first axiom and the two axioms jointly. We then show that the second axiom is equivalent to a mono-linearity axiom, which characterizes a local linearity property of preference. Our work provides an axiomatic approach to the smooth preference model developed by Machina and Chew et al.; this paper may thus be regarded as a bridge between the dual theory of Yaari and the smooth preference model of Machina and Chew et al., and it extends their results to unbounded outcome spaces. Homogeneity and mono-linearity provide additional flexibility in characterizing irregular behavior, and examples are provided to illustrate their applications.

Keywords: Mono-linearity, Dual theory, Smooth preference, Independence axiom, Unbounded outcomes, Rank-dependent expected utility, Axiomatic approach.

JEL Classification: D81, C0.

Suggested Citation

Cao, Xi-Ren and Wan, Xiangwei, Mono-Linearity-Based Axiomatic Approach to Non-Linear Expected Utility (November 12, 2013). Available at SSRN: https://ssrn.com/abstract=2353740 or http://dx.doi.org/10.2139/ssrn.2353740

Xi-Ren Cao

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200052
China

Xiangwei Wan (Contact Author)

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No.1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China
+86-21-52301570 (Phone)

HOME PAGE: http://sites.google.com/view/wanxiangwei/research

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