Collective risk aversion
AbstractIn this paper we analyse the risk attitude of a group of heterogenous agents and we develop a theory of comparative collective risk tolerance. In particular, we characterize how shifts in the distribution of individual levels of risk tolerance affect the representative agent's degree of risk tolerance. In the model with efficient risk – sharing and two agents (e.g. a household) with isoelastic preferences we show that an increase of the level of risk tolerance of one of the agents might have an ambiguous impact on the aggregate level of risk tolerance; the latter increases for some levels of aggregate wealth while it decreases for other levels of aggregate wealth. Specifically, there are two possible shapes for aggregate risk tolerance as a function of the risk tolerance level of one of the agents: increasing curve or increasing then decreasing curve. For more general populations we characterize the effect of first order like shifts (individual levels of risk tolerance more concentrated on high values) and second order like shifts (more dispersion on individual levels of risk tolerance) on the collective level of risk tolerance. We also evaluate how shifts in the distribution of individual levels of risk tolerance impact the collective level of risk tolerance in a framework with exogenous egalitarian sharing rules. Our results permit to better characterize differences in risk taking behavior between groups and individuals and among groups with different distribution of risk preferences.
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Bibliographic InfoPaper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/5673.
Date of creation: 2013
Date of revision:
Publication status: Published in Social Choice and Welfare, 2013, Vol. 40, no. 2. pp. 411-437.Length: 26 pages
collective risk; heterogenous agents; risk tolerance; isoelastic preferences; aggregate wealth; risk preferences;
Other versions of this item:
- D1 - Microeconomics - - Household Behavior
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-16 (All new papers)
- NEP-MIC-2013-11-16 (Microeconomics)
- NEP-NET-2013-11-16 (Network Economics)
- NEP-UPT-2013-11-16 (Utility Models & Prospect Theory)
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