Some Econometric Problems in the Measurement of Utility

Abstract

Abstract Econometric problems in the measurement of utility are noted and solutions provided. When lotteries which are used to elicit risk preferences are chained or linked they compound error terms. If a utility index is constructed to estimate the utility function, the estimates will be inefficient and possibly biased. An econometric model that attaches an additive error term to the response of the decision maker and does not require indexing is shown to be a better alternative.

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