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Professor Dreze is a highly respected mathematical economist and econometrician. This book brings together some of his major contributions to the economic theory of decision making under uncertainty, and also several essays. These include an important essay on 'Decision theory under moral hazard and state dependent preferences' that significantly extends modern theory, and which provides rigorous foundations for subsequent chapters. Topics covered within the theory include decision theory, market allocation and prices, consumer decisions, theory of the firm, labour contracts, and public decisions.
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Essays on economic decisions under uncertainty To Monique 'Without uncertainty, love, which always entails risks as well as the joy of discovery, loses its sharp edge.' Essays on economic decisions under uncertainty JACQUES H. DREZE The right of the University of Cambridge to print and sell all manner of books was granted by Henry VIII in 1534. The University has printed and published continuously since 1584. CAMBRIDGE UNIVERSITY PRESS Cambridge New York Port Chester Melbourne Sydney CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, Sao Paulo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www. Cambridge. org Information on this title: www.cambridge.org/9780521264846 © Cambridge University Press 1987 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 1987 First paperback edition 1990 Re-issued in this digitally printed version 2008 A catalogue recordfor this publication is available from the British Library Library of Congress Cataloguing in Publication data Dreze, Jacques H. Essays on economic decisions under uncertainty. Includes bibliographies. 1. Decision-making - Addresses, essays, lectures. 2. Uncertainty - Addresses, essays, lectures. 3. Consumers' preferences -Addresses, essays, lectures. I. Title. HD30.23.D74 1986 338.5 85-19541 ISBN 978-0-521-26484-6 hardback ISBN 978-0-521-38697-5 paperback Contents Acknowledgements Page xv Foreword I Decision-making under uncertainty: general theory 1 Axiomatic theories of choice, cardinal utility and subjective probability: a review 1 Historical perspective 2 The conceptual framework 2.1 About events 2.2 About consequences 2.3 About constant acts 3 Axioms of a normative theory 4 Objections to the normative appeal of the axioms 5 Merits and limitations of the theory 5.1 Relevance 5.2 Usefulness 5.3 Generality 5.4 Integration with other theories 5.5 Overall evaluation 6 Link with economic applications References 2 Decision theory with moral hazard and statedependent preferences 1 Introduction 1.1 Scope and example 1.2 Moral hazard xvii 1 3 4 6 7 8 8 9 13 15 15 16 17 18 19 20 21 23 23 23 26 vi Contents 1.3 State-dependent preferences 1.4 Organisation and concepts 2 The model and notation 3 The von Neumann-Morgenstern theorem 4 The Anscombe-Aumann theorem 5 Value of information and equipotence 6 Decision theory with state-independent preferences and moral hazard 6.1 Constant games are omnipotent 6.2 Generalised moral expectation theorem 6.3 Equipotence and probabilities 6.4 Conditional values and subjective probabilities 7 Properties of the set of attainable probabilities 7.1 Dimensionality of P 7.2 Finitely many pure strategies 8 Decision theory with state-dependent preferences and moral hazard 8.1 Conditional preferences and conditional utilities 8.2 Main results 8.3 Elicitation and iden