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Calibrating the wealth effects of decoupled payments: Does decreasing absolute risk aversion matter?

  • Just, David R.

Arrow's hypotheses regarding the relationship between wealth and risk aversion measures have formed the basis for a large body of empirical research and theory. For example, many have suggested that decoupled farm subsidy payments may increase production as they decrease farmers' risk aversion. This paper develops a new calibration technique designed to measure the minimum change in concavity of a utility of wealth function necessary to describe a particular change in production behavior for some discrete change in wealth. I conclude that measurable changes in production levels should not be produced by changing levels of risk aversion except when wealth changes are a substantial portion of wealth. This tool draws into question the usefulness of Arrow's hypotheses in many current applications.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 162 (2011)
Issue (Month): 1 (May)
Pages: 25-34

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Handle: RePEc:eee:econom:v:162:y:2011:i:1:p:25-34
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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