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

American Journal of Agricultural Economics, Forthcoming

29 Pages Posted: 6 Jun 2008 Last revised: 26 Apr 2010

Marc F. Bellemare

University of Minnesota - Twin Cities - Department of Applied Economics

Zachary S. Brown

OECD; Duke Global Health Institute

Date Written: July 11, 2009

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 Classification: C12, D86, G32, Q19

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: https://ssrn.com/abstract=1140668

Marc F. Bellemare (Contact Author)

University of Minnesota - Twin Cities - Department of Applied Economics ( email )

MN
United States

Zachary S. Brown

OECD ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Duke Global Health Institute ( email )

Durham, NC 27708-0328
United States

HOME PAGE: http://www.duke.edu/~zsb2

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