I this paper we roughly quantify the degree of risk aversion induced by three rationales for corporate risk management: the cost of financial distress, costly external finance, and the principal-agent relationship between shareholders and management. In so doing, we provide a foundation for the use of corporate utility functions. However, we are unable to fully support the degree of risk aversi...

Huachun Xiong, Jinxing Xie, Xiaoxue Deng Department of Mathematical Sciences, Tsinghua University, Beijing 100084, China Abstract Traditional literature studying overbooking problems focuses on risk-neutral decision makers. In this paper, we propose a multi-period overbooking model incorporating risk-aversion and extend well-known structural results (the 3-region policy) under the risk-neutral ...

In this paper I use the smooth ambiguity model developed by Klibanoff, Marinacci, and Mukerji (2005) to define the concepts of ambiguity and uncertainty premia in a way analogous to what Pratt (1964) did in the risk theory literature. I show that those concepts may be useful to quantify the effect ambiguity has on the welfare of economic agents. I also provide local approximations of these prem...

The classic Allingham and Sandmo’s (Journal of Public Economics, 1 (1972) 323–338) portfolio choice approach to income tax evasion has been increasingly criticised because it requires an ‘excess’ degree of risk aversion to explain the observed rate of tax compliance. In this paper we argue that there may not necessarily be ‘excess risk aversion’; and that the evidence can be explained by the di...

Within the expected-utility framework, the only explanation for risk aversion is that the utility function for wealth is concave: A person has lower marginal utility for additional wealth when she is wealthy than when she is poor. This paper provides a theorem showing that expected-utility theory is an utterly implausible explanation for appreciable risk aversion over modest stakes: Within expe...

The Pareto principle is often viewed as a mild requirement compatible with a variety of value judgements. In particular, it is generally thought that it can accommodate different views on the desirable degree of equality. We show that this is generally not true in intertemporal models where some uncertainty prevails. To do so, we formalize the concept of inequality aversion. We show that differ...

This paper estimates the degree of risk aversion of contestants appearing on Vas o No Vas, the Mexican version of Deal or No Deal. We consider both dynamic agents who fully backward induct and myopic agents that only look forward one period. Further, we vary the level of forecasting sophistication by the agents. We find substantial evidence of risk aversion, the degree of which is more modest t...

This paper reports the results of a detailed investigation of the risk-averse and loss-averse behaviour of UK individual investors. An one-period analytical model of investing behaviour is developed to explore the differences between individuals who are risk averse, and those whose behaviour is better described by Kahneman & Tversky’s Prospect Theory. Questionnaire data on risk perceptions is u...

This paper documents the relation between risk attitude and college attendance. A measure of the degree of risk aversion is constructed based upon the National Longitudinal Survey for Youth. Statistics and estimation results suggest that risk aversion may have a negative impact on the decision to attend college. Several potential endogeneity problems are discussed. (

Do Wages Really Compensate for Risk Aversion and Skewness Affection? Utility theory suggests that foreseeable risk should increase the compensation for work. This paper expands on this notion: on basis of utility theory, people should care not only about risk but also about the skewness in the distribution of the compensation paid. In particular, because the degree of risk aversion ought to dec...