Risk-neutral firms can extract unbounded profits from consumers with prospect theory preferences

Eduardo M. Azevedo, Daniel Gottlieb

Research output: Contribution to journalArticlepeer-review

15 Scopus citations

Abstract

This paper considers the problem of a risk-neutral firm offering a gamble to consumers with preferences given by prospect theory. Under conditions satisfied by virtually all functional forms used in the literature, firms can extract arbitrarily high expected values from consumers. Moreover, for any given lottery, there exists another lottery that makes both the firm and the consumer better off. As a consequence, equilibria and Pareto optimal allocations do not exist in standard monopolistic or competitive models.

Original languageEnglish
Pages (from-to)1291-1299
Number of pages9
JournalJournal of Economic Theory
Volume147
Issue number3
DOIs
StatePublished - 1 May 2012
Externally publishedYes

Keywords

  • Dutch books
  • Equilibrium existence
  • Insurance markets
  • Prospect theory

Fingerprint

Dive into the research topics of 'Risk-neutral firms can extract unbounded profits from consumers with prospect theory preferences'. Together they form a unique fingerprint.

Cite this