A behavioral study on the value of elasticity of marginal utility in environmental risks

Abstract

The choice of elasticity of marginal utility greatly affects time discount rate, and is thus key parameter in welfare analysis across generations. This research elicits the value of elasticity of marginal utility with a behavioral experiment. Participants make behavioral decisions under environmental risks the experiment. Through the use of iso-elastic utility function, we derive elasticity of marginal utility. We find that the value of elasticity of marginal utility much lower than those used in existing literature. In addition, we notice that and people tend to overestimate the subjective probability of environmental risks in the experiment. A lower value of elasticity of marginal utility based upon real environmental behavior suggests a lower time discount rate. This is more preferable to make ethically motivated decisions on the welfare distribution across generations, and is more consistent with public attitudes.