Changes in Background Risk and Risk Taking Behavior
AbstractWe consider the effects of changes in the distribution of a background risk on the optimal risk taking behaviour of a risk- averse decision maker. In particular, we suppose that the background risk deteriorates via a first- or second-degree stochastic dominance shift. Our contention is that such a change in background wealth should lead the individual to behave in a more risk-averse manner in decisions concerning any other independent risk. We examine conditions on preferences that are both necessary and sufficient for all FSD or SSD changes in background wealth to entail this property. These conditions place restrictions on the stronger measure of risk aversion defined by Ross .
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Bibliographic InfoPaper provided by Risk and Insurance Archive in its series Working Papers with number 005.
Date of creation: Jun 1994
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background risk; properness; strong risk aversion.;
Other versions of this item:
- Eeckhoudt, Louis & Gollier, Christian & Schlesinger, Harris, 1996. "Changes in Background Risk and Risk-Taking Behavior," Econometrica, Econometric Society, vol. 64(3), pages 683-89, May.
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- Meyer, Jack & Ormiston, Michael B, 1985. "Strong Increases in Risk and Their Comparative Statics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 425-37, June.
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