Intensity of Preferences for Bivariate Risk Apportionment
17 Pages Posted: 20 Apr 2020 Last revised: 2 Dec 2020
Date Written: March 26, 2020
Bivariate risk apportionment is the preference for dispersing risks associated with two aspects of individuals' well being into different states of the world. In this paper, we propose an intensity measure of this preference by extending to the bivariate case the concept of marginal rate of substitution between risks of different orders introduced in the univariate case by Liu and Meyer (2013). We show that the intensity measure of the preference for bivariate risk apportionment is characterized by bivariate risk attitudes in the sense of Ross. The usefulness of our measures to understand economic choices is illustrated by the analysis of two specific decisions: savings under environmental risk and medical treatment in the presence of diagnostic risks.
Keywords: Bivariate utility function, Increase in bivariate risks, Risk apportionment, Comparative risk aversion, Ross risk aversion
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