Risk aversion in the small and in the large when outcomes are multidimensional

Hellwig, Martin

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URL: http://ub-madoc.bib.uni-mannheim.de/2722
URN: urn:nbn:de:bsz:180-madoc-27224
Document Type: Working paper
Year of publication: 2004
The title of a journal, publication series: None
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: D82 D81 ,
Subject headings (SWD): Risikoaversion , Erwarteter Nutzen , Risikoprämie
Keywords (English): multidimensional risks , risk aversion , risk premia , randomization in incentive schemes
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.
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