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Locally Greater Vulnerability to Background Risk

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Author Info

  • Donald C. Keenan

    (Department of Economics, University of Georgia, Athens, Georgia 30602, USA)

  • Arthur Snow

    (Department of Economics, University of Georgia, Athens, Georgia 30602, USA, e-mail: snow@terry.uga.edu)

Abstract

Willingness to take on risk is influenced by the presence of fair and unfair background risks for decision makers who are risk vulnerable as defined by Gollier and Pratt [1996], for these decision makers are more risk averse when they possess such an uninsurable background risk. We present an alternative derivation of the index of local vulnerability based on Diamond and Stiglitz [1974] compensated increases in risk, such that risk aversion increases with the introduction of any small fair background risk if and only if the index of local vulnerability is positive. We establish that the increase in risk aversion is greater for those who are more vulnerable as measured by the index of local vulnerability. The Geneva Papers on Risk and Insurance Theory (2003) 28, 161–172. doi:10.1023/A:1026344905367

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 28 (2003)
Issue (Month): 2 (December)
Pages: 161-172

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Handle: RePEc:pal:genrir:v:28:y:2003:i:2:p:161-172

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Cited by:
  1. Liu, Liqun & Rettenmaier, Andrew J., 2007. "Effects of mortality risk on risk-taking behavior," Economics Letters, Elsevier, vol. 94(1), pages 49-55, January.
  2. Donald C., Rudow, 2005. "Preferences and Increased Risk Aversion under a General Framework of Stochastic Dominance," MPRA Paper 41191, University Library of Munich, Germany, revised 07 Jun 2005.
  3. Günter Franke & Richard C. Stapleton & Marti G. Subrahmanyam, 2005. "Incremental Risk Vulnerability," CoFE Discussion Paper 05-08, Center of Finance and Econometrics, University of Konstanz.

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