Skip to main content
SpringerLink
Log in

Lotteries and the Law of Demand

  • Chapter
  • First Online:
New Insights into the Theory of Giffen Goods

Part of the book series: Lecture Notes in Economics and Mathematical Systems ((LNE,volume 655))

Abstract

In economies with nonconvexities consumers can increase their expected utility by consuming lotteries. Lotteries are probability distributions over bundles in the consumption set. Standard revealed preference logic can be applied to choices in lottery space, however the implications are not readily interpretable. In this paper, we formulate the law of demand for lottery economies in terms of commodity price changes and changes in demand for commodities. The finding is that the standard expression of the compensated law of demand necessarily holds in expectation only.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
eBook
USD 16.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 109.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    For a discussion of the consumer’s lottery choice problem in this environment see [5].

  2. 2.

    An example constructed from a single functional form is provided in Garratt [4].

References

  1. Cook, P.J. and D.A. Graham, “The Demand for Insurance and Protection: The Case of Irreplaceable Commodities,” Quarterly Journal of Economics, 1977, 91, 143–156.

    Article  Google Scholar 

  2. Friedman, M. and L. Savage, “Utility Analysis of Choices Involving Risk,” Journal of Political Economy, 1948, 56(4), 279–304.

    Article  Google Scholar 

  3. Garratt, R., “Decentralizing Lottery Allocations in Markets With Indivisible Commodities, Economic Theory, 1995, 5, 295–313.

    Article  Google Scholar 

  4. Garratt, R., “A Tale of Two Cities and a Giffen Good,” Canadian Journal of Economics, February 2005, 38(1), 49–56.

    Google Scholar 

  5. Garratt, R., T. Keister, C.-Z. Qin and K. Shell, “Equilibrium Prices when the Sunspot Variable is Continuous, Journal of Economic Theory, November 2002, 107, 11–38.

    Google Scholar 

  6. Garratt, R., T. Keister and K. Shell, “Comparing Sunspot Equilibrium and Lottery Equilibrium Allocations: The Finite Case, International Economic Review, May 2004, 45(2), 351–386.

    Google Scholar 

  7. Garratt, R. and J.M. Marshall, “Public Finance of Private Goods: The Case of College Education, Journal of Political Economy, 1994, 102(3), 566–582.

    Article  Google Scholar 

  8. Garratt, R. and J.M. Marshall, “Insurable Interest, Options to Convert and Demand for Upper Limits in Optimum Property Insurance,” Journal of Risk and Insurance, 1996, 63, 185–206.

    Article  Google Scholar 

  9. Hansen, G., “Indivisible Labor and the Business Cycle, Journal of Monetary Economics, 1985, 16, 309–328.

    Article  Google Scholar 

  10. Mas-Colell, A., M.D. Whinston and J.R. Green, 1995, Microeconomic Theory, Oxford University Press, New York.

    Google Scholar 

  11. Ng, Y.-K., “Why do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure,” Journal of Political Economy, 1965, 73, 530–535.

    Article  Google Scholar 

  12. Prescott, E. and R. Townsend, “General Competitive Analysis in an Economy with Private Information,” Internation Economic Review, 1984, 25, 1–20.

    Article  Google Scholar 

  13. Prescott, E. and R. Townsend, “Firms as Clubs in Walrasian Markets with Private Information, Working Paper 00-8, Federal Reserve Bank of Richmond, September 2000.

    Google Scholar 

  14. Rogerson, R., “Indivisible Labor, Lotteries and Equilibrium,” Journal of Monetary Economics, 1988, 21, 3–16.

    Article  Google Scholar 

  15. Shell, K. and R. Wright, “Indivisibilities, Lotteries, and Sunspot Equilibria, Economic Theory, 1993, 3, 1–17.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, University of California, Santa Barbara, CA, 93106, USA

    Rodney J. Garratt

Authors
  1. Rodney J. Garratt
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Rodney J. Garratt .

Editor information

Editors and Affiliations

  1. , Social Sciences, Wageningen University, Hollandseweg 1, Wageningen, 6706 KN, Netherlands

    Wim Heijman

  2. , Social Sciences, Wageningen University, Hollandseweg 1, Wageningen, 6706 KN, Netherlands

    Pierre von Mouche

Rights and permissions

Reprints and permissions

Copyright information

© 2012 Springer Berlin Heidelberg

About this chapter

Cite this chapter

Garratt, R.J. (2012). Lotteries and the Law of Demand. In: Heijman, W., von Mouche, P. (eds) New Insights into the Theory of Giffen Goods. Lecture Notes in Economics and Mathematical Systems, vol 655. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-21777-7_12

Download citation

  • DOI: https://doi.org/10.1007/978-3-642-21777-7_12

  • Published:

  • Publisher Name: Springer, Berlin, Heidelberg

  • Print ISBN: 978-3-642-21776-0

  • Online ISBN: 978-3-642-21777-7

  • eBook Packages: Business and EconomicsEconomics and Finance (R0)

Publish with us

Policies and ethics

Search

Navigation