Risk Aversion in the Small and in the Large. When Outcomes are Multidimensional
27 Pages Posted: 21 Jul 2004
Date Written: June 2004
Abstract
The paper discusses criteria for comparing risk aversion of decision makers when outcomes are multidimensional. A weak concept, "commodity specific greater risk aversion", is based on the comparison of risk premia paid in a specified commodity. A stronger concept, "uniformly greater risk aversion" is based on the comparison of risk premia regardless of what commodities are used for payment. Neither concept presumes that von Neumann-Morgenstern utility functions are ordinally equivalent. Nonincreasing consumption specific risk aversion is shown to be sufficient to make randomization undesirable in an agency problem with hidden characteristics.
Keywords: Multidimensional Risks, Risk Aversion, Risk Premia, Randomization in Incentive Schemes
JEL Classification: D81, D82
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
A Contribution to the Theory of Optimal Utilitarian Income Taxation
-
A Contribution to the Theory of Optimal Utilitarian Income Taxation
-
A Maximum Principle for Control Problems with Monotonicity Constraints
-
The Undesirability of Randomized Income Taxation Under Decreasing Risk Aversion
-
Randomization in Optimal Income Tax Schedules
By Dagobert L. Brito, Jonathan H. Hamilton, ...
-
Incentive Problems with Unidimensional Hidden Characteristics: A Uni fied Approach