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Revisiting CES utility functions for distributional preferences: Do people face the equality–efficiency trade-off?

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  • Keigo Inukai
  • Yuta Shimodaira
  • Kohei Shiozawa

Abstract

While the constant elasticity of substitution (CES) utility function is widely used in the modified dictator game, a well-known shortcoming is that the distribution parameter loses its interpretation in the limit of the substitution parameter. This paper shows that previously proposed solutions for this problem necessarily have a similar mathematical shortcoming. Hence, we propose a new CES specification to address this problem and demonstrate its usefulness. Our results clarified empirical inconsistencies in the conventional analysis of measuring subjects' preferences. In particular, the conventional interpretation of the substitution parameter, “the equality–efficiency trade-off,” is not based on subjects' behavior.

Suggested Citation

  • Keigo Inukai & Yuta Shimodaira & Kohei Shiozawa, 2022. "Revisiting CES utility functions for distributional preferences: Do people face the equality–efficiency trade-off?," ISER Discussion Paper 1195r, Institute of Social and Economic Research, Osaka University, revised Sep 2024.
    • Handle: RePEc:dpr:wpaper:1195r
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