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Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules

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  • Chiaki Hara

    ()
    (Institute of Economic Research, Kyoto University)

  • James Huang

    ()
    (Department of Accounting and Management, Lancaster University Management School)

  • Christoph Kuzmics

    ()
    (MEDS, Kellogg School of Management, Northwestern University)

Abstract

We study the representative consumer's risk attitude and efficient risk-sharing rules in a singleperiod, single-good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes. We prove that if all consumers have convex absolute risk tolerance, so must the representative consumer. We also identify a relationship between the curvature of an individual consumer's individual risk sharing rule and his absolute cautiousness, the first derivative of absolute risk-tolerance. Furthermore, we discuss some consequences of these results and refinements of these results for the class of HARA utility functions.

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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 620.

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Length: 26pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:kyo:wpaper:620

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Keywords: Aggregation; heterogeneous consumers; absolute risk tolerance; mutual fund theorem.;

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