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Utility of wealth with many indivisibilities

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  • Vasquez, Markus

Abstract

We introduce a class of utility of wealth functions, called knapsack utility functions, which are appropriate for agents who must choose an optimal collection of indivisible goods subject to a spending constraint. We investigate the concavity/convexity and regularity properties of these functions. We find that convexity–and thus a demand for gambling–is the norm, but that the incentive to gamble is more pronounced at low wealth levels. We consider an intertemporal version of the problem in which the agent faces a credit constraint. We find that the agent’s utility of wealth function closely resembles a knapsack utility function when the agent’s saving rate is low.

Suggested Citation

  • Vasquez, Markus, 2017. "Utility of wealth with many indivisibilities," Journal of Mathematical Economics, Elsevier, vol. 71(C), pages 20-27.
    • Handle: RePEc:eee:mateco:v:71:y:2017:i:c:p:20-27
    DOI: 10.1016/j.jmateco.2017.03.005
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    References listed on IDEAS

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    1. Roger Hartley & Lisa Farrell, 2002. "Can Expected Utility Theory Explain Gambling?," American Economic Review, American Economic Association, vol. 92(3), pages 613-624, June.
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    4. Nils H. Hakansson, 1970. "Friedman-Savage Utility Functions Consistent with Risk Aversion," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 472-487.
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    7. Bailey, Martin J & Olson, Mancur & Wonnacott, Paul, 1980. "The Marginal Utility of Income Does not Increase: Borrowing, Lending, and Friedman-Savage Gambles," American Economic Review, American Economic Association, vol. 70(3), pages 372-379, June.
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    Cited by:

    1. Markus Rieger‐Fels, 2024. "Why do people buy insurance? A modern answer to an old question," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 27(1), pages 89-114, April.
    2. Fels, Markus, 2019. "Risk attitudes with state-dependent indivisibilities in consumption," Ruhr Economic Papers 805, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.

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