The Pareto-Efficient Relativity of Relative Risk Aversion
AbstractIn a pure-exchange economy involving one perishable consumption good and risk-averse consumers, the elasticity of a consumer’s Pareto-efficient consumption with respect to aggregate output equals the reciprocal of the ratio of the consumer’s coefficient of relative risk aversion to average relative risk aversion. Therefore, this elasticity is unity for someone with average relative risk aversion, whereas consumers with above average relative risk aversion transfer some of their aggregate- output risk to consumers with below average relative risk aversion. This result has important implications on the financial securities needed to complete markets, inflation indexing, and central bank goals and targeting objectives.
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Bibliographic InfoPaper provided by EconWPA in its series Microeconomics with number 0509004.
Length: 20 pages
Date of creation: 12 Sep 2005
Date of revision:
Note: Type of Document - pdf; pages: 20. This deals with Arrow- Debreu pure-exchange economies without storage.
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state-contingent securities; Arrow-Debreu economy; Pareto efficiency; relative risk aversion;
Find related papers by JEL classification:
- D1 - Microeconomics - - Household Behavior
- D2 - Microeconomics - - Production and Organizations
- D3 - Microeconomics - - Distribution
- D4 - Microeconomics - - Market Structure and Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-09-29 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Zvi Bodie & Alex Kane & Robert McDonald, 1985.
"Inflation and the Role of Bonds in Investor Portfolios,"
in: Corporate Capital Structures in the United States, pages 167-196
National Bureau of Economic Research, Inc.
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- David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, EconWPA.
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