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A General Theorem on the Comparative Statics of Changes in Risk

Author

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  • Arthur Hau

    (Assistant Professor, Department of Economics and Finance, University of Central Arkansas, 201 Donaghey Avenue, Conway, AR 72035, USA, e-mail: ahau@mail.uca.edu)

Abstract

In this paper, the concept of “absolutely riskier than” is introduced to generalize Gollier's (Journal of Economic Theory, 66, 522–535) necessary and sufficient conditions for the comparative statics of a change in risk for risk averters. The restrictive assumption that the payoff function is monotonic in the risk is relaxed. The “policymaker's choice problem,” the “newsboy problem,” and a farmer's example are used to illustrate how easily the monotonicity assumption is violated. Finally, some important properties of the concept of “absolutely riskier than,” such as its relation with the concept of “second-order stochastic dominance,” are illustrated using the farmer's example. The Geneva Papers on Risk and Insurance Theory (2001) 26, 25–41. doi:10.1023/A:1011260207279

Suggested Citation

  • Arthur Hau, 2001. "A General Theorem on the Comparative Statics of Changes in Risk," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 26(1), pages 25-41, June.
    • Handle: RePEc:pal:genrir:v:26:y:2001:i:1:p:25-41
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    Cited by:

    1. Hau, Arthur, 2006. "Production under uncertainty with insurance or hedging," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 347-359, April.
    2. Tzeng, Larry Y. & Wang, Jen-Hung, 2004. "Increase in risk and saving behavior," Journal of Economics and Business, Elsevier, vol. 56(5), pages 405-414.

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