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Risk And Probability Premiums For Cara Utility Functions

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  • Babcock, Bruce A.
  • Choi, E. Kwan
  • Feinerman, Eli

Abstract

The risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.

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Bibliographic Info

Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

Volume (Year): 18 (1993)
Issue (Month): 01 (July)
Pages:

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Handle: RePEc:ags:jlaare:30810

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Web page: http://waeaonline.org/
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Keywords: Risk and Uncertainty;

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  1. Babcock, Bruce A. & Chalfant, James A. & Collender, R. N., 1987. "Simultaneous Input Demands and Land Allocation in Agricultural Production Under Uncertainty," Staff General Research Papers 10614, Iowa State University, Department of Economics.
  2. Yassour, Joseph & Zilberman, David & Rausser, Gordon C, 1980. "Optimal choices among alternative technologies with stochastic yield," CUDARE Working Paper Series 155, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  3. repec:cdl:agrebk:1141583 is not listed on IDEAS
  4. King, Robert P. & Lybecker, Donald W., 1983. "Flexible, Risk-Oriented Marketing Strategies For Pinto Bean Producers," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 8(02), December.
  5. William T. McSweeny & Randall A. Kramer, 1986. "The Integration of Farm Programs for Achieving Soil Conservation and Nonpoint Pollution Control Objectives," Land Economics, University of Wisconsin Press, vol. 62(2), pages 159-173.
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