COMPARING IMPUTED AND ACTUAL UTILITY FUNCTIONS IN A COMPETITIVE BIDDING SETTING

Abstract

ABSTRACT The main focus of this article is to compare utility functions derived by the Von Neumann‐Morgenstern conceptual apparatus with those imputed through actual pricing behavior. The study is cast in a competitive bidding setting in the oil drilling industry. A version of the Friedman bidding model is used to generate separate bidding models for two drilling contractors. From the actual bids submitted by the contractors and those generated by the model, one can construct each contractor's imputed utility function. An examination of a contractor's derived and imputed utility functions over a common range of outcomes then provides a diagnostic check on the veracity of the Von Neumann‐Morgenstern theory as a prescriptive model of executive behavior.