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Risk And Probability Premiums For Cara Utility Functions

  • Babcock, Bruce A.
  • Choi, E. Kwan
  • Feinerman, Eli

The risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.

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File URL: http://purl.umn.edu/30810
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Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

Volume (Year): 18 (1993)
Issue (Month): 01 (July)
Pages:

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Handle: RePEc:ags:jlaare:30810
Contact details of provider: Web page: http://waeaonline.org/

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  1. Babcock, Bruce A. & Chalfant, James A. & Collender, R. N., 1987. "Simultaneous Input Demands and Land Allocation in Agricultural Production Under Uncertainty," Staff General Research Papers 10614, Iowa State University, Department of Economics.
  2. Yassour, Joseph & Zilberman, David D. & Rausser, Gordon C., 1980. "Optimal choices among alternative technologies with stochastic yield," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0gt334fc, Department of Agricultural & Resource Economics, UC Berkeley.
  3. King, Robert P. & Lybecker, Donald W., 1983. "Flexible, Risk-Oriented Marketing Strategies For Pinto Bean Producers," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 8(02), December.
  4. William T. McSweeny & Randall A. Kramer, 1986. "The Integration of Farm Programs for Achieving Soil Conservation and Nonpoint Pollution Control Objectives," Land Economics, University of Wisconsin Press, vol. 62(2), pages 159-173.
  5. repec:cdl:agrebk:1141583 is not listed on IDEAS
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