Efficient Risk-Sharing Rules with Heterogeneous Risk Attitudes and Background Risks
Abstract
In an exchange economy in which there is a complete set of markets for macroeconomic risks but no market for idiosyncratic risks, we consider how the efficient risk-sharing rules for the macroeconomic risk are affected by the heterogeneity in the consumers' risk attitudes and idiosyncratic risks. We provide sufficient conditions under which an idiosyncratic risk increases cautiousness (the derivative of the reciprocal of the absolute risk aversion), the determinant of the curvatures of the efficient risk-sharing rules. While the curvature of the risk-sharing rules at high consumption levels are governed by the consumers' risk attitudes, the curvature at low consumption levels depend not only on the risk attitudes but also on the lower tail distributions of the idiosyncratic risks.Download Info
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 621.Length: 30pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:kyo:wpaper:621
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Related research
Keywords: Efficient risk-sharing rules; relative risk aversion; absolute risk tolerance; Inada condition; idiosyncratic risks; background risks; incomplete markets.;Find related papers by JEL classification:
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-27 (All new papers)
- NEP-CFN-2006-05-27 (Corporate Finance)
- NEP-FIN-2006-05-27 (Finance)
- NEP-FMK-2006-05-27 (Financial Markets)
- NEP-UPT-2006-05-27 (Utility Models & Prospect Theory)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Chiaki Hara, 2005.
"Heterogeneous Risk Attitudes in a Continuous-Time Model,"
KIER Working Papers
609, Kyoto University, Institute of Economic Research.
- Chiaki Hara, 2006. "Heterogeneous Risk Attitudes In A Continuous-Time Model," The Japanese Economic Review, Japanese Economic Association, vol. 57(3), pages 377-405.
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