Risk attitudes and the value of risk transformations
(2013) International Journal of Economic Theory — Vol. 9, n° 3, p. 245-254 (2013)
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- Abstract
- An increase in risk aversion, defined by a concavification of the utility function, does not always increase the willingness to pay (WTP) for a mean-preserving reduction in risk. This is why Ross () proposed a stronger measure of increased risk aversion that maintains for mean-preserving changes in risk the result obtained by Arrow () and Pratt () for risk elimination. Ross's () contribution was later extended to higher orders using Ekern's () notion of a higher-degree increase in risk. In this paper, we show that these measures remain valid under less restrictive assumptions than those implied by Ekern's () approach and we refer to the concept of mean-preserving stochastic dominance. Finally, we also extend the analysis conducted for the WTP to the willingness to accept.
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Denuit, M., & Eeckhoudt, L. (2013). Risk attitudes and the value of risk transformations. International Journal of Economic Theory, 9(3), 245-254. https://doi.org/10.1111/j.1742-7363.2013.12017.x (Original work published 2013)