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Heterogeneous Risk Attitudes In A Continuous-Time Model

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  • CHIAKI HARA

Abstract

We prove that every continuous-time model in which all consumers have time-homogeneous and time-additive utility functions and share a common probabilistic belief and a common discount rate can be reduced to a static model. This result allows us to extend some of the existing results on the representative consumer and risk-sharing rules in static models to continuous-time models. We show that the equilibrium interest rate is lower and more volatile than in the standard representative consumer economy, and that the individual consumption growth rates are more dispersed than is predicted from the first-order conditions.

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Bibliographic Info

Article provided by Japanese Economic Association in its journal Japanese Economic Review.

Volume (Year): 57 (2006)
Issue (Month): 3 ()
Pages: 377-405

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Handle: RePEc:bla:jecrev:v:57:y:2006:i:3:p:377-405

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  1. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
  2. Chiaki Hara & James Huang & Christoph Kuzmics, 2006. "Efficient Risk-Sharing Rules with Heterogeneous Risk Attitudes and Background Risks," KIER Working Papers 621, Kyoto University, Institute of Economic Research.
  3. Schmedders, Karl, 2007. "Two-fund separation in dynamic general equilibrium," Theoretical Economics, Econometric Society, vol. 2(2), June.
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  6. Masao Ogaki & Qiang Zhang, 1998. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Working Papers 98-02, Ohio State University, Department of Economics.
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  13. Dumas, Bernard, 1989. "Two-Person Dynamic Equilibrium in the Capital Market," Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 157-88.
  14. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
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Cited by:
  1. Chiaki Hara, 2009. "Heterogeneous Impatience in a Continuous-Time Model," KIER Working Papers 665, Kyoto University, Institute of Economic Research.
  2. Hara, Chiaki & Huang, James & Kuzmics, Christoph, 2007. "Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules," Discussion Paper 323, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  3. Hara, Chiaki, 2008. "Complete monotonicity of the representative consumer's discount factor," Journal of Mathematical Economics, Elsevier, vol. 44(12), pages 1321-1331, December.
  4. Chiaki Hara & James Huang & Christoph Kuzmics, 2006. "Efficient Risk-Sharing Rules with Heterogeneous Risk Attitudes and Background Risks," KIER Working Papers 621, Kyoto University, Institute of Economic Research.

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