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Risk aversion and risk loving in the small: a decomposition of the multivariate risk premium

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  • Marco G. Ercolani

Abstract

This note proposes a decomposition of the familiar scalar multivariate risk premium into components which can be easily interpreted in the context of consumer theory. The premium under consideration is the standard one used to ascertain the impact of price and income risk on consumer welfare. This proposed premium decomposition allows for a more intuitive identification of the detrimental and beneficial effects that arise from income and price risk. As an illustrative example, this decomposition is used to ascertain the welfare effects arising from the price fluctuations experienced by UK households over the period 1963-97. Copyright Blackwell Publishers Ltd and the Board of Trustees of the Bulletin of Economic Research, 2004.

Suggested Citation

  • Marco G. Ercolani, 2004. "Risk aversion and risk loving in the small: a decomposition of the multivariate risk premium," Bulletin of Economic Research, Wiley Blackwell, vol. 56(1), pages 81-106, January.
  • Handle: RePEc:bla:buecrs:v:56:y:2004:i:1:p:81-106
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    Cited by:

    1. Eisenhauer, Joseph G., 2006. "Risk aversion and prudence in the large," Research in Economics, Elsevier, vol. 60(4), pages 179-187, December.

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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