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A TEST OF COMPETING EXPLANATIONS OF COMPENSATION DEMANDED
Author(s) -
Horowitz John K.,
Mcconnell K. E.,
Quiggin John
Publication year - 1999
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1999.tb01453.x
Subject(s) - convexity , compensation (psychology) , economics , prospect theory , regular polygon , mathematical economics , microeconomics , econometrics , payment , test (biology) , expected utility hypothesis , mathematics , psychology , social psychology , financial economics , paleontology , geometry , finance , biology
We find that prospect theory behavior is significantly more prevalent than utility theory behavior in experiments involving multiple, real items. In the experiments, subjects were endowed with three items and asked the minimum payments they required to be willing to return one, two, or three of them. Our key observation is that prospect theory implies concavity of compensation demanded, whereas utility theory implies convexity. We examine whether the compensation demanded is convex or concave in the number of items returned. ( JEL C91)