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Why (and When) are Preferences Convex? Threshold Effects and Uncertain Quality

Tasnádi, Attila and Smith, Trenton G. (2009) Why (and When) are Preferences Convex? Threshold Effects and Uncertain Quality. The B.E. Journal of Theoretical Economics, 9 (1). DOI 10.2202/1935-1704.1518

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Official URL: http://www.bepress.com/bejte/vol9/iss1/art3/


Abstract

It is often assumed (for analytical convenience, but also in accordance with common intuition) that consumer preferences are convex. In this paper, we consider circumstances under which such preferences are (or are not) optimal. In particular, we investigate a setting in which goods possess some hidden quality with known distribution, and the consumer chooses a bundle of goods that maximizes the probability that he receives some threshold level of this quality. We show that if the threshold is small relative to consumption levels, preferences will tend to be convex; whereas the opposite holds if the threshold is large. Our theory helps explain a broad spectrum of economic behavior (including, in particular, certain common commercial advertising strategies), suggesting that sensitivity to information about thresholds is deeply rooted in human psychology.

Item Type:Article
Series Number / Identification Number:10.2202/1935-1704.1518
Uncontrolled Keywords:endogenous preferences, evolution, advertising
Subjects:Mathematics, Econometrics
Psychology
DOI:10.2202/1935-1704.1518
ID Code:294
Deposited By: Ádám Hoffmann
Deposited On:05 Mar 2011 11:02
Last Modified:03 Jul 2012 00:24

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