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  3. American Economic Review
  4. November 2014
  5. Asset Demand Based Tests of Expected Utility Maximization

Asset Demand Based Tests of Expected Utility Maximization

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Abstract

We provide conditions under which contingent claim and asset demands are consistent with state independent Expected Utility maximization. The paper focuses on the case of a single commodity and demands are allowed to be functions of probabilities and not just prices and income. We extend prior analyses by deriving three distinct tests for demands to be rationalized by Expected Utility: (i) a contingent claim analogue to the certainty strong axiom of revealed preference, (ii) a characterization of the functional form for demand and (iii) necessary and sufficient conditions based on the Slutsky matrix.

Citation

Kubler, Felix, Larry Selden, and Xiao Wei. 2014. "Asset Demand Based Tests of Expected Utility Maximization." American Economic Review, 104 (11): 3459-80. DOI: 10.1257/aer.104.11.3459

Additional Materials

JEL Classification

  • D01 Microeconomic Behavior: Underlying Principles
  • D11 Consumer Economics: Theory
  • D81 Criteria for Decision-Making under Risk and Uncertainty