On the Economic Meaning of Machina's Frechet Differentiability Assumption
AbstractThis note shows that Machina's (1982) assumption that preferences over lotteries are smooth has some economic implications. We show that FrÃ¢âchet differentiability implies that preferences represent second order risk aversion (as well as conditional second order risk aversion). This implies, among other things, that decision makers buy full insurance only at the absence of marginal loading. We also show that with constant absolute and relative risk aversion, expected value maximization, second order risk aversion, and FrÃ¢âchet differentiability are equivalent.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 104 (2002)
Issue (Month): 2 (June)
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Web page: http://www.elsevier.com/locate/inca/622869
Other versions of this item:
- Zvi Safra & Uzi Segal, 2001. "On the Economic Meaning of Machina's Frâ„chet Differentiability Assumption," Boston College Working Papers in Economics 511, Boston College Department of Economics.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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