Optimal Choices under Uncertainty: The Case of Two-Argument Utility Functions.

This paper presents a unified treatment for the analysis of two-argument utility functions with a random budget constraint. The way in which changes in both additive and multiplicative risk affect optimal choices has been analyzed prov iding intuitive economic explanations to third order magnitudes which usually appear in this kind of analysis. Two examples are given in t erms of optimal savings and labor supply under uncertainty. Finally, an application to taxation under uncertainty is given, where both the effects of increased tax progressivity and the rules for efficient t axation are analyzed. Copyright 1988 by Royal Economic Society.