ROSS MEETS BELL: Linex utility and riskier background risk
نویسندگان
چکیده
At rst glance, there would appear to be no relationship between Bell's (1988) concept of one-switch utility functions and that of a stronger measure of risk aversion due to Ross (1981). We show however that speci c assumptions about the behavior of the stronger measure of risk aversion also give rise to the linex utility function which belongs to the class of one-switch utility functions. In particular, this utility class is the only one that satis es a stronger version of Kimball's (1993) standard risk aversion over all levels of wealth. We apply our results to consider nth-degree deteriorations in background risk and their e ect on the demand for insurance.
منابع مشابه
Higher-order generalizations of Arrow-Pratt and Ross risk aversion: A comparative statics approach
We analyze comparative risk aversion in a new way, through a comparative statics problem in which, for a cost, agents can shift from an initial probability distribution toward a preferred distribution. The Ross characterization arises when the original distribution is riskier than the preferred distribution and the cost is monetary, and theArrow–Pratt characterization ariseswhen the original di...
متن کاملComparative Ross Risk Aversion in the Presence of Mean Dependent Risks
This paper studies comparative risk aversion between risk averse agents in the presence of a background risk. Although the literature covers this question extensively, our contribution differs from most of the literature in two respects. First, background risk does not need to be additive or multiplicative. Second, the two risks are not necessary mean independent, and may be conditional expecta...
متن کاملEstimating a Bounded Normal Mean Under the LINEX Loss Function
Let X be a random variable from a normal distribution with unknown mean θ and known variance σ2. In many practical situations, θ is known in advance to lie in an interval, say [−m,m], for some m > 0. As the usual estimator of θ, i.e., X under the LINEX loss function is inadmissible, finding some competitors for X becomes worthwhile. The only study in the literature considered the problem of min...
متن کاملBargaining with a Residual Claimant: An Experimental Study
We conduct an experiment of two player bargaining in which the payoff to one player is subject to ex-post risk, while the other player receives a fixed payment, effectively making the player exposed to risk a residual claimant. Contrary to intuition, recent theoretical work argues that exposure to risk may actually be beneficial to the residual claimant, and we test this in a controlled lab exp...
متن کاملRisk premiums and certainty equivalents of loss-averse newsvendors of bounded utility
Loss-averse behavior makes the newsvendors avoid the losses more than seeking the probable gains as the losses have more psychological impact on the newsvendor than the gains. In economics and decision theory, the classical newsvendor models treat losses and gains equally likely, by disregarding the expected utility when the newsvendor is loss-averse. Moreover, the use of unbounded utility to m...
متن کامل