Engaging with Discreteness: Gambling, Under-Participation, and Lotteries in Economies with Indivisible Goods

45 Pages Posted: 15 Dec 2019

See all articles by Bingcun Dai

Bingcun Dai

University of Oxford, Said Business School, Students

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business

Mungo Ivor Wilson

University of Oxford - Said Business School

Date Written: November 26, 2019

Abstract

We study an endowment economy with heterogeneous agents and two complementary consumption goods, one of which is indivisible. Although agents have standard concave preferences, the indivisibility gives rise to Friedman-Savage convexity in indirect utility. Agents care about relative, not just absolute, wealth, and about the magnitude of wealth differences as well as rankings. While agents dislike small risks, they like large ones. Poorer agents exhibit a preference for lottery-like assets with negative expected returns and also invest a smaller share of wealth than richer agents in assets with positive expected returns. If the difference in wealth is large, poor agents play a lottery among themselves with a single winner. In consequence, richer agents have a higher expected return on wealth and inequality is expected to increase. While initial inequality affects investment choices, it has only a minor effect on ultimate inequality. Therefore, standard prescriptions for reducing inequality may have little effect.

Keywords: Indivisible goods, Friedman-Savage, lotteries, skewness, non-participation

JEL Classification: G12

Suggested Citation

Dai, Bingcun and Savor, Pavel G. and Wilson, Mungo Ivor, Engaging with Discreteness: Gambling, Under-Participation, and Lotteries in Economies with Indivisible Goods (November 26, 2019). Available at SSRN: https://ssrn.com/abstract=3494006 or http://dx.doi.org/10.2139/ssrn.3494006

Bingcun Dai

University of Oxford, Said Business School, Students ( email )

Oxford, OX1 5NY
United Kingdom

Pavel G. Savor (Contact Author)

DePaul University - Kellstadt Graduate School of Business ( email )

1 E. Jackson Blvd.
Chicago, IL
United States

Mungo Ivor Wilson

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288914 (Phone)

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