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Economic Theory

, Volume 54, Issue 2, pp 273–285 | Cite as

Cobb-Douglas preferences under uncertainty

  • José Heleno Faro
Research Article

Abstract

This paper axiomatizes Cobb-Douglas preferences under uncertainty. First, we extend the original Trockel (Econ Lett 30:7–10, 1989)’s axiomatic foundation to a general state space framework based on the Strong Homotheticity Axiom, obtaining also the incomplete case a la Bewley (Decis Econ Financ 25:79–110, 2002). We show that this key axiom for the Cobb-Douglas expected utility specification is refuted by Ellsberg’s uncertainty aversion behavioral pattern. Our main result provides a set of meaningful axioms characterizing Cobb-Douglas min-expected utility preferences, an important class of uncertainty averse preferences for studying the consequences of ambiguity in finance and other fields. Finally, we present briefly how to obtain more general representations like the variational case.

Keywords

Cobb-Douglas preferences Expected utility Ellsberg paradox Knightian uncertainty Incomplete preferences MEU preferences 

JEL Classification

D81 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Insper Institute of Education and ResearchSão PauloBrazil

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