שלחו לחבר

A Model of Indivisible Consumption Categories

Speaker
Kfir Tshuva
Date
03/08/2021 - 12:30 - 11:30
Place
Economics building (504), faculty lounge on the 1st floor, and also in Zoom: https://us02web.zoom.us/j/82536086839
Affiliation
Bar-Ilan University
Abstract

We offer a model that adapts the classical consumer choice model by assuming the indivisibility of consumption categories. Specifically, we assume that most consumption categories have a minimal expenditure threshold. This seems plausible with reference to real life (e.g., consumption related to car-ownership, or consumption related to buying a house). Our model provides a novel explanation for two puzzles: (1) why people often buy both insurance and lottery tickets, (2) why people often behave in a way consistent with narrow framing of their situation rather than acting out of global principles of maximization. We show that the complexity level of the consumer problem is non-monotonic and relatively small for low wealth NP-hard for medium wealth and polynomial for high enough wealth. Next, we show that the model induces decreasing absolute risk aversion in wealth. we also show that investing in a lottery ticket (i.e., a product with high gain - small loss) can be worthwhile for those with low wealth and for a medium wealth the added value of the lottery decreases down to a negative value as wealth increases Finally, we show that for significant loss/gain the model induce the fourfold pattern of risk attitude: small probability inducing risk aversion for loss and risk loving for gain and high probability inducing risk loving for loss and risk aversion for gain.

To view the seminar recording, click here.

Attached file

תאריך עדכון אחרון : 03/08/2021