Toward a Systematic Approach to the Economic Effects of Risk: Characterizing Utility Functions

34 Pages Posted: 5 Jun 2018

See all articles by Christian Gollier

Christian Gollier

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics; University of Colorado Boulder; Center for Economic and Social Research, USC; National Bureau of Economic Research (NBER)

Date Written: June 2018

Abstract

The diffidence theorem, together with complementary tools, can aid in illuminating a broad set of questions about how to mathematically characterize the set of utility functions with specified economic properties. This article establishes the technique and illustrates its application to many questions, old and new. For example, among many other older and other technically more difficult results, it is shown that (1) several implications of globally greater risk aversion depend on distinct mathematical properties when the initial wealth level is known, (2) whether opening up a new asset market increases or decreases saving depends on whether the reciprocal of marginal utility is concave or convex, and (3) whether opening up a new asset market raises or lowers risk aversion toward small independent risks depends on whether absolute risk aversion is convex or concave.

Suggested Citation

Gollier, Christian and Kimball, Miles S., Toward a Systematic Approach to the Economic Effects of Risk: Characterizing Utility Functions (June 2018). Journal of Risk and Insurance, Vol. 85, Issue 2, pp. 397-430, 2018. Available at SSRN: https://ssrn.com/abstract=3189181 or http://dx.doi.org/10.1111/jori.12249

Christian Gollier (Contact Author)

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics ( email )

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University of Colorado Boulder ( email )

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HOME PAGE: http://www.colorado.edu/Economics/people/faculty/kimball.html

Center for Economic and Social Research, USC ( email )

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National Bureau of Economic Research (NBER)

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