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Risk and Probability Premiums for Cara Utility Function

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Author Info

  • Babcock, Bruce A.
  • Choi, E. Kwan
  • Feinerman, Eli

Abstract

The risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 596.

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Date of creation: 01 Jul 1993
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Publication status: Published in Journal of Agricultural and Resource Economics, July 1993, vol. 18 no. 1, pp. 17-24
Handle: RePEc:isu:genres:596

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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  1. William T. McSweeny & Randall A. Kramer, 1986. "The Integration of Farm Programs for Achieving Soil Conservation and Nonpoint Pollution Control Objectives," Land Economics, University of Wisconsin Press, vol. 62(2), pages 159-173.
  2. King, Robert P. & Lybecker, Donald W., 1983. "Flexible, Risk-Oriented Marketing Strategies For Pinto Bean Producers," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 8(02), December.
  3. Babcock, Bruce A. & Chalfant, James A. & Collender, Robert N., 1987. "Simultaneous Input Demands And Land Allocation In Agricultural Production Under Certainty," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 12(02), December.
  4. Yassour, Joseph & Zilberman, David D. & Rausser, Gordon C., 1980. "Optimal choices among alternative technologies with stochastic yield," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0gt334fc, Department of Agricultural & Resource Economics, UC Berkeley.
  5. repec:cdl:agrebk:1141583 is not listed on IDEAS
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