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On the (Mis)Use of Wealth as a Proxy for Risk Aversion

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  • Marc F. Bellemare
  • Zachary S. Brown

Abstract

Tests of risk sharing in the contracting literature often rely on wealth as a proxy for risk aversion. The intuition behind these tests is that since contract choice is monotonic in the coefficients of risk aversion, which are themselves assumed monotonic in wealth, the effect of a change in wealth on contract choice is clearly identified. We show that tests of risk sharing relying on wealth as a proxy for risk aversion are identified only insofar as the econometrician is willing to assume that (a) the principal is risk neutral or her preferences exhibit constant absolute risk aversion (CARA); and (b) the agent is risk neutral. Copyright 2010, Oxford University Press.

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Bibliographic Info

Article provided by Agricultural and Applied Economics Association in its journal American Journal of Agricultural Economics.

Volume (Year): 92 (2010)
Issue (Month): 1 ()
Pages: 273-282

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Handle: RePEc:oup:ajagec:v:92:y:2010:i:1:p:273-282

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The Economics of Malaria Vector Control
    by Marc F. Bellemare in Marc F. Bellemare on 2012-11-14 10:00:39
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Cited by:
  1. Steven C. Blank & Danny Klinefelter, 2012. "Keeping ARMS relevant: increasing its usability," Agricultural Finance Review, Emerald Group Publishing, vol. 72(2), pages 222-232, July.
  2. Bellemare, Marc F., 2009. "The (Im)Possibility of Reverse Share Tenancy," MPRA Paper 23681, University Library of Munich, Germany.
  3. Liu, Elaine M. & Huang, JiKun, 2013. "Risk preferences and pesticide use by cotton farmers in China," Journal of Development Economics, Elsevier, vol. 103(C), pages 202-215.
  4. Franken, Jason R.V. & Pennings, Joost M.E. & Garcia, Philip, 2012. "Measuring Risk Attitude and Relation to Marketing Behavior," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124471, Agricultural and Applied Economics Association.
  5. Cho, In Soo, 2013. "Are Risk Attitudes Fixed Factors or Fleeting Feelings?," Staff General Research Papers 35751, Iowa State University, Department of Economics.
  6. Bellemare, Marc F., 2010. "Insecure Land Rights and Share Tenancy in Madagascar," MPRA Paper 23640, University Library of Munich, Germany.

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