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A Reconsideration of Arrow-Lind: Risk Aversion, Risk Sharing, and Agent Choice

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  • Eric Fesselmeyer
  • Leonard J. Mirman
  • Marc Santugini

Abstract

We consider the original Arrow-Lind framework in which a government undertakes a risky project to be shared among many taxpayers. In our model, the taxpayers decide the level of participation in the risky project. Moreover, the amount of taxes collected by the government fully finances the public project. In this case, we show that projects cannot be evaluated only on the basis of expected benefits since the resulting tax determined by the model is incompatible with any risk sharing.

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File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2012/CIRPEE12-01.pdf
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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1201.

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Date of creation: 2012
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Handle: RePEc:lvl:lacicr:1201

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Keywords: Arrow-Lind Theorem; Risk aversion; Risk sharing; Choice;

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  1. Leonard J. Mirman & Marc Santugini, 2008. "Firms, Shareholders, and Financial Markets," Cahiers de recherche 08-05, HEC Montréal, Institut d'économie appliquée, revised Mar 2013.
  2. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, vol. 60(3), pages 364-78, June.
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