Article ID: | iaor20082521 |
Country: | United States |
Volume: | 53 |
Issue: | 2 |
Start Page Number: | 340 |
End Page Number: | 354 |
Publication Date: | Feb 2007 |
Journal: | Management Science |
Authors: | Feinberg Fred M., Menzefricke Ulrich, Kim Jin Gyo |
Keywords: | markov processes |
Empirical evidence suggests that decision makers often weight successive additional units of a valued attribute or monetary endowment unequally, so that their utility functions are intrinsically nonlinear or irregularly shaped. Although the analyst may impose various functional specifications exogenously, this approach is ad hoc, tedious, and reliant on various metrics to decide which specification is ‘best’. In this paper, we develop a method that yields individual-level, flexibly shaped utility functions for use in choice models. This flexibility at the individual level is accomplished through splines of the truncated power basis type in a general additive regression framework for latent utility. Because the number and location of spline knots are unknown, we use the birth–death process of Denison