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

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