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On the Effect of Risk Aversion in Two-Person, Two-State Finance Economies

Author

Listed:
  • Berden Caroline

    (Maastricht University, c.berden@ke.unimaas.nl)

  • Peters Hans

    (Maastricht University, h.peters@ke.unimaas.nl)

Abstract

The effect of replacing an agent in a two-person two-state finance economy by a more risk averse agent is studied. It is established under which conditions the other agent benefits or looses in equilibrium from dealing with a more risk averse agent. If one agent becomes more risk averse, then the equilibrium allocation moves towards that agent's certainty line. Whether or not that is beneficial for the other agent depends on the location of the endowment point.

Suggested Citation

  • Berden Caroline & Peters Hans, 2008. "On the Effect of Risk Aversion in Two-Person, Two-State Finance Economies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-18, January.
    • Handle: RePEc:bpj:bejtec:v:7:y:2008:i:1:n:47
    DOI: 10.2202/1935-1704.1394
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    References listed on IDEAS

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    1. Claus-Jochen Haake & Bettina Klaus, 2009. "Monotonicity and Nash implementation in matching markets with contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 41(3), pages 393-410, December.
    2. Caroline Berden & Hans Peters, 2006. "On the Effect of Risk Aversion in Bimatrix Games," Theory and Decision, Springer, vol. 60(4), pages 359-370, June.
    3. Kobberling, Veronika & Peters, Hans, 2003. "The effect of decision weights in bargaining problems," Journal of Economic Theory, Elsevier, vol. 110(1), pages 154-175, May.
    4. LeRoy,Stephen F. & Werner,Jan, 2014. "Principles of Financial Economics," Cambridge Books, Cambridge University Press, number 9781107024120, February.
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    More about this item

    Keywords

    two-person two-state finance economies; risk aversion;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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