CentER Discussion Paper Series No. 2010-81
Posted: 8 Aug 2010
Date Written: August 4, 2010
This note proposes the Burr utility function. Burr utility is a flexible two-parameter family that behaves approximately power-like (CRRA) remote from the origin, while exhibiting exponential-like (CARA) features near the origin. It thus avoids the extreme behavior of the power family near the origin. We show how to characterize Burr utility as a special case in the general class of utility functions with non-increasing and convex absolute risk aversion, and non-decreasing and concave relative risk aversion. We further show its connection to the Burr probability distribution. A related class of generalized exponential utility functions is also studied.
Keywords: Cardinal scale, Utility function, Harmonic absolute risk aversion
JEL Classification: D81
Suggested Citation: Suggested Citation