Diminishing Marginal Utility Revisited

81 Pages Posted: 11 Apr 2015

See all articles by Miles S. Kimball

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics; University of Colorado Boulder; Center for Economic and Social Research, USC; National Bureau of Economic Research (NBER)

Fumio Ohtake

Osaka University - Institute of Social and Economic Research

Daniel Reck

London School of Economics & Political Science (LSE)

Yoshiro Tsutsui

Osaka University - Graduate School of Economics

Fudong Zhang

Tsinghua University - PBC School of Finance

Date Written: April 10, 2015

Abstract

How quickly does marginal utility diminish? It depends on the dimension along which we consider concavity of the utility function. This paper estimates the distribution of heterogeneous curvature parameters in individuals’ utility functions from hypothetical choice data, while carefully accounting for survey response error. Types of curvature examined include relative risk aversion, intertemporal substitution, the altruism elasticity, and a new measure of how much more a dollar means to a poor family than to a rich family, called inequality aversion. The estimated distribution varies depending on the type of curvature we consider, with median values of curvature parameters ranging from 0.6 to 13.2. We estimate differences for different ways of asking about the same parameter for inequality aversion and risk aversion. Utility functions are most concave for situations involving altruism, followed by risk aversion, inequality aversion, and intertemporal substitution. Heterogeneity of curvature in the population also varies: altruism is the most heterogeneous, followed by risk aversion, intertemporal substitution, and inequality aversion. Nonetheless, curvature parameters are highly correlated (rho>0.8) across individuals for different means of examining the same parameter, and modestly correlated across dimensions in some cases, including inequality aversion and risk aversion (0.3), altruism and risk aversion (0.3), and altruism and inequality aversion (0.14).

Keywords: diminishing marginal utility, hypothetical choice, risk aversion, intertemporal substitution, altruism

JEL Classification: C42, D10, D60

Suggested Citation

Kimball, Miles S. and Ohtake, Fumio and Reck, Daniel and Tsutsui, Yoshiro and Zhang, Fudong, Diminishing Marginal Utility Revisited (April 10, 2015). Available at SSRN: https://ssrn.com/abstract=2592935 or http://dx.doi.org/10.2139/ssrn.2592935

Miles S. Kimball (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

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University of Colorado Boulder ( email )

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HOME PAGE: http://www.colorado.edu/Economics/people/faculty/kimball.html

Center for Economic and Social Research, USC ( email )

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National Bureau of Economic Research (NBER)

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Fumio Ohtake

Osaka University - Institute of Social and Economic Research ( email )

1-1 Yamadaoka
Suita
Osaka, 565-0871
Japan

Daniel Reck

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Yoshiro Tsutsui

Osaka University - Graduate School of Economics ( email )

1-7 Machikaneyama
Toyonaka, 560-0043
Japan

Fudong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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