Risk Aversion in the Small and in the Large. When Outcomes are Multidimensional

27 Pages Posted: 21 Jul 2004

See all articles by Martin F. Hellwig

Martin F. Hellwig

Max Planck Institute for Research on Collective Goods; University of Bonn - Department of Economics; European Corporate Governance Institute (ECGI)

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

Hellwig, Martin F., Risk Aversion in the Small and in the Large. When Outcomes are Multidimensional (June 2004). Available at SSRN: https://ssrn.com/abstract=567101 or http://dx.doi.org/10.2139/ssrn.567101

Martin F. Hellwig (Contact Author)

Max Planck Institute for Research on Collective Goods ( email )

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University of Bonn - Department of Economics

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