AbstractThis note proposes the Burr utility function. Burr utility is a flexible two-parameter family that behaves approximately power-like (CRRA) remote from the origin, while exhibiting exponential-like (CARA) features near the origin. It thus avoids the extreme behavior of the power family near the origin. We show how to characterize Burr utility as a special case in the general class of utility functions with non-increasing and convex absolute risk aversion, and non-decreasing and concave relative risk aversion. We further show its connection to the Burr probability distribution. A related class of generalized exponential utility functions is also studied.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-81.
Date of creation: 2010
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Cardinal scale; Utility function; Harmonic absolute risk aversion (HARA); Exponential utility; Power utility;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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