<ol>
<li>Apart from the convenience of working with isoelastic utility (also called constant relative risk aversion (CRRA) utility), the main appeal that comes to my mind comes from macroeconomics. It can be shown (see Acemoglu 2009 textbook, exercise 8.27) that CRRA utility is the only utility function consistent with balanced growth if technology is labor-augmenting. Macroeconomists like the classical growth model and balanced growth seems to account for the data in the US well.</li>
<li>CRRA has nice features: it's concave, no bliss-point and constant relative risk aversion seems plausible relative to alternatives such as constant absolute risk aversion (CARA). For example, under CARA, Bill Gates would care about losing $10 the same as me. We might think it's more realistic that Bill Gates would care the same amount as me about losing 10% of his net wealth.</li>
<li>In the real world there is no one consumption good. This utility function doesn't tell us how/if we can even aggregate multiple goods into one consumption good. So for certain questions it may not be so fitting. Further, in other areas such as finance they seem to prefer utility functions such as quadratic utility. If utility is quadratic, then expected utility is fully determined by the mean and the variance of consumption. This appears to be appealing in explaining the data also.</li>
</ol>

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2022-11-23T18:59:49.183Z
2022-11-23T18:59:49.183Z
Fića
<p>An isoelastic utility function is used in both simple and advanced models. I understand that it is fairly convenient to work with mathematically and that there are empirical estimations of its parameters. However, I am wondering</p>
<ol>
<li>What are the main reasons for the prevalence of this choice?</li>
<li>Is it empirically supported to be representative of people's behaviour?</li>
<li>What are the alternatives, especially ones that are more empirically supported?</li>
</ol>

<microeconomics><mathematical-economics><utility><consumer-theory>
Why is isoelastic utility function so prevalent?
cc88
# Why is isoelastic utility function so prevalent?

(Asked by: username_0 on 2022-11-23)

An isoelastic utility function is used in both simple and advanced models. I understand that it is fairly convenient to work with mathematically and that there are empirical estimations of its parameters. However, I am wondering

1. What are the main reasons for the prevalence of this choice?
2. Is it empirically supported to be representative of people's behaviour?
3. What are the alternatives, especially ones that are more empirically supported?

**Tags:** microeconomics, mathematical-economics, utility, consumer-theory


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## 1 answers

### Answer by username_1 on 2022-11-23. Score: 6 | Accepted answer

1. Apart from the convenience of working with isoelastic utility (also called constant relative risk aversion (CRRA) utility), the main appeal that comes to my mind comes from macroeconomics. It can be shown (see Acemoglu 2009 textbook, exercise 8.27) that CRRA utility is the only utility function consistent with balanced growth if technology is labor-augmenting. Macroeconomists like the classical growth model and balanced growth seems to account for the data in the US well.
2. CRRA has nice features: it's concave, no bliss-point and constant relative risk aversion seems plausible relative to alternatives such as constant absolute risk aversion (CARA). For example, under CARA, Bill Gates would care about losing $10 the same as me. We might think it's more realistic that Bill Gates would care the same amount as me about losing 10% of his net wealth.
3. In the real world there is no one consumption good. This utility function doesn't tell us how/if we can even aggregate multiple goods into one consumption good. So for certain questions it may not be so fitting. Further, in other areas such as finance they seem to prefer utility functions such as quadratic utility. If utility is quadratic, then expected utility is fully determined by the mean and the variance of consumption. This appears to be appealing in explaining the data also.


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