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On the (Mis)Use of Wealth as a Proxy for Risk Aversion

Marc F. Bellemare
Duke University - Sanford School of Public Policy; Duke University - Department of Economics

Zachary S. Brown
Nicholas School of the Environment and Earth Sciences



American Journal of Agricultural Economics, Forthcoming

Abstract:     
Tests of risk sharing in the contracting literature often rely on wealth as a proxy for risk aversion. The intuition behind these tests is that since contract choice is monotonic in the coefficients of risk aversion, which are themselves assumed monotonic in wealth, the effect of a change in wealth on contract choice is clearly identified. We show that tests of risk sharing relying on wealth as a proxy for risk aversion are only identified insofar as the econometrician is willing to assume that (i) the principal is risk-neutral or her preferences exhibit CARA; and (ii) the agent is risk-neutral.

Keywords: Contract theory, principal-agent models, risk sharing, empirical tests, risk aversion

JEL Classifications: C12, D86, G32, Q19

Accepted Paper Series

Date posted: June 06, 2008 ; Last revised: September 29, 2009

Suggested Citation

Bellemare, Marc F. and Brown, Zachary S., On the (Mis)Use of Wealth as a Proxy for Risk Aversion (July 11, 2009). American Journal of Agricultural Economics, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1140668


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Contact Information

Marc F. Bellemare (Contact Author)
Duke University - Sanford School of Public Policy ( email )
201 Science Drive
P.O. Box 90239
Durham, NC 27708-0239
United States
919-613-7405 (Phone)
919-681-8288 (Fax)
HOME PAGE: http://sites.google.com/site/marcfbellemare/
Duke University - Department of Economics
Durham, NC 27708-0204
United States
Zachary S. Brown
Nicholas School of the Environment and Earth Sciences ( email )
Box 90328
Durham, NC 27708-0328
United States
3045215594 (Phone)
HOME PAGE: http://www.duke.edu/~zsb2
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