Uzi Segal (Department of Economics, University of Western Ontario, London, CANADA N6A 5C2) Avia Spivak (Department of Economics, Ben Gurion University, Beer Sheva 84105, ISRAEL)
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First-order risk aversion happens when the risk premium a decision maker is willing to pay to avoid the lottery $t\cdot {\tilde \epsilon }, E[{\tilde \epsilon }]=0,$ is proportional, for small t, to t. Equivalently, $\partial \pi /\partial t\mid_{t=0^{+}}> 0.$ We show that first-order risk aversion is equivalent to a certain non-differentiability of some of the local utility functions (Machina [7]).
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Article provided by Springer in its journal Economic Theory.
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