On Microfoundations of the Dual Theory of Choice

Guriev, SG (2001) On Microfoundations of the Dual Theory of Choice. Geneva Risk and Insurance Review, 26. pp. 117-137. ISSN 1554-964X

Abstract

We show that Yaari's dual theory of choice under risk may be derived as an indirect utility when a risk-neutral agent faces financial imperfections. We consider an agent that maximizes expected discounted cash flows under a bid-ask spread in the credit market. It turns out that the agent evaluates lotteries as if she were maximizing Yaari's dual utility function. We also generalize the dual theory of choice for unbounded lotteries.