Lotteries and the Law of Demand

Chapter

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.

References

  1. 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.CrossRefGoogle Scholar
  2. 2.
    Friedman, M. and L. Savage, “Utility Analysis of Choices Involving Risk,” Journal of Political Economy, 1948, 56(4), 279–304.CrossRefGoogle Scholar
  3. 3.
    Garratt, R., “Decentralizing Lottery Allocations in Markets With Indivisible Commodities, Economic Theory, 1995, 5, 295–313.CrossRefGoogle Scholar
  4. 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. 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. 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. 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.CrossRefGoogle Scholar
  8. 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.CrossRefGoogle Scholar
  9. 9.
    Hansen, G., “Indivisible Labor and the Business Cycle, Journal of Monetary Economics, 1985, 16, 309–328.CrossRefGoogle Scholar
  10. 10.
    Mas-Colell, A., M.D. Whinston and J.R. Green, 1995, Microeconomic Theory, Oxford University Press, New York.Google Scholar
  11. 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.CrossRefGoogle Scholar
  12. 12.
    Prescott, E. and R. Townsend, “General Competitive Analysis in an Economy with Private Information,” Internation Economic Review, 1984, 25, 1–20.CrossRefGoogle Scholar
  13. 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. 14.
    Rogerson, R., “Indivisible Labor, Lotteries and Equilibrium,” Journal of Monetary Economics, 1988, 21, 3–16.CrossRefGoogle Scholar
  15. 15.
    Shell, K. and R. Wright, “Indivisibilities, Lotteries, and Sunspot Equilibria, Economic Theory, 1993, 3, 1–17.CrossRefGoogle Scholar

Copyright information

© Springer Berlin Heidelberg 2012

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of CaliforniaSanta BarbaraUSA

Personalised recommendations