Diminishing Marginal Utility Revisited
81 Pages Posted: 11 Apr 2015
Date Written: April 10, 2015
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: Suggested Citation