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Broadly Decreasing Risk Aversion

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  • Gregory M. Gelles

    (Department of Economics, 101 Harris Hall, University of Missouri-Rolla, Rolla, Missouri 65409-1250)

  • Douglas W. Mitchell

    (Department of Economics, West Virginia University, Morgantown, West Virginia 26506-6025)

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    Abstract

    This paper considers decision-making in the presence of two additive risk sources, with no restrictions on the relation between the two risks. A utility function is said to exhibit broad DARA if and only if a rise in wealth always decreases the magnitude of the risk premium for one of the risks vis-a-vis the other. A condition on utility functions giving this property is derived: utility must be of the linear plus exponential form. It is shown that certain problems involving portfolios and risk-averse firms give unambiguous comparative statics if and only if utility exhibits broad DARA.

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    File URL: http://dx.doi.org/10.1287/mnsc.45.10.1432
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 10 (October)
    Pages: 1432-1439

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    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:10:p:1432-1439

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    Related research

    Keywords: decision-making under risk; choice under uncertainty; two risk sources; risk premium; risk averse firm; portfolio choice;

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    Cited by:
    1. Martin Bohner & Gregory Gelles, 2012. "Risk aversion and risk vulnerability in the continuous and discrete case," Decisions in Economics and Finance, Springer, vol. 35(1), pages 1-28, May.
    2. Conniffe, Denis, 2008. "Generalised Means of Simple Utility Functions with Risk Aversion," The Economic and Social Review, Economic and Social Studies, vol. 39(1), pages 1-12.
    3. Keenan, Donald C. & Snow, Arthur, 2012. "Ross risk vulnerability for introductions and changes in background risk," Journal of Mathematical Economics, Elsevier, vol. 48(4), pages 197-206.
    4. Gelles, Gregory M. & Mitchell, Douglas W., 2002. "Increasingly mean-seeking utility functions and n-asset portfolios," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(5), pages 911-919.

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