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Representative consumer's risk aversion and efficient risk-sharing rules

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  • Hara, Chiaki
  • Huang, James
  • Kuzmics, Christoph

Abstract

We study the representative consumer's risk attitude and efficient risk-sharing rules in a singleperiod, single-good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes. We prove that if all consumers have convex absolute risk tolerance, so must the representative consumer. We also identify a relationship between the curvature of an individual consumer's individual risk sharing rule and his absolute cautiousness, the first derivative of absolute risk-tolerance. Furthermore, we discuss some consequences of these results and refinements of these results for the class of HARA utility functions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 137 (2007)
Issue (Month): 1 (November)
Pages: 652-672

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Handle: RePEc:eee:jetheo:v:137:y:2007:i:1:p:652-672

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Web page: http://www.elsevier.com/locate/inca/622869

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