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Ambiguity aversion, higher-order risk attitude and optimal effort

Listed author(s):
  • Huang, Rachel J.

In this paper, we examine whether a more ambiguity-averse individual will invest in more effort to shift her initial starting wealth distribution toward a better target distribution. We assume that the individual has ambiguous beliefs regarding two target (starting) distributions and that one distribution is preferred to the other. We find that an increase in ambiguity aversion will decrease (increase) the optimal effort when the cost of effort is non-monetary. When the cost of effort is monetary, the effect depends on whether the individual would make more effort when the target (starting) distribution is the preferred distribution than the target (starting) distributions, the inferior one. We further characterize the individual’s higher-order risk preferences to examine the sufficient conditions.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167668712000030
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Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 50 (2012)
Issue (Month): 3 ()
Pages: 338-345

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Handle: RePEc:eee:insuma:v:50:y:2012:i:3:p:338-345
DOI: 10.1016/j.insmatheco.2012.01.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

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  1. Jean, William H, 1980. " The Geometric Mean and Stochastic Dominance," Journal of Finance, American Finance Association, vol. 35(1), pages 151-158, March.
  2. Arthur Snow, 2010. "Ambiguity and the value of information," Journal of Risk and Uncertainty, Springer, vol. 40(2), pages 133-145, April.
  3. Chow, Clare Chua & Sarin, Rakesh K, 2001. "Comparative Ignorance and the Ellsberg Paradox," Journal of Risk and Uncertainty, Springer, vol. 22(2), pages 129-139, March.
  4. Jullien, B. & Salanie, B. & Salanie, F., 1998. "Should More Risk-Averse Agents Exert More Effort?," Papers 98.489, Toulouse - GREMAQ.
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  6. Jean, William H, 1984. " The Harmonic Mean and Other Necessary Conditions for Stochastic Dominance," Journal of Finance, American Finance Association, vol. 39(2), pages 527-534, June.
  7. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
  8. Arthur Snow, 2011. "Ambiguity aversion and the propensities for self-insurance and self-protection," Journal of Risk and Uncertainty, Springer, vol. 42(1), pages 27-43, February.
  9. Chiu, W.Henry, 2005. "Degree of downside risk aversion and self-protection," Insurance: Mathematics and Economics, Elsevier, vol. 36(1), pages 93-101, February.
  10. Itzhak Gilboa & David Schmeidler, 1989. "Maxmin Expected Utility with Non-Unique Prior," Post-Print hal-00753237, HAL.
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  12. Caballé, Jordi & Pomansky, Alexey, 1995. "Mixed Risk Aversion," Working Paper Series 444, Research Institute of Industrial Economics.
  13. O.C. Chuang & L. Eeckhoudt & R.J. Huang & L.Y. Tzeng, 2013. "Risky targets and effort," Post-Print hal-00845897, HAL.
  14. DIONNE, George & EECKHOUDT, Louis, "undated". "Self-insurance, self-protection and increased risk aversion," CORE Discussion Papers RP 623, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. DACHRAOUI, Kaïs & DIONNE, Georges & EECKHOUDT, Louis & GODFROID, Philippe, "undated". "Comparative mixed risk aversion: definition and application to self-protection and willingness to pay," CORE Discussion Papers RP 1835, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Einhorn, Hillel J & Hogarth, Robin M, 1986. "Decision Making under Ambiguity," The Journal of Business, University of Chicago Press, vol. 59(4), pages 225-250, October.
  17. Harrell Chesson & W. Viscusi, 2003. "Commonalities in Time and Ambiguity Aversion for Long-Term Risks ," Theory and Decision, Springer, vol. 54(1), pages 57-71, February.
  18. Eric Briys & Harris Schlesinger & J.-Matthias Graf v. d. Schulenburg, 1991. "Reliability of Risk Management: Market Insurance, Self-Insurance and Self-Protection Reconsidered," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 16(1), pages 45-58, June.
  19. repec:hhs:iuiwop:444 is not listed on IDEAS
  20. Halevy, Yoram, 2005. "Ellsberg Revisited: an Experimental Study," Microeconomics.ca working papers halevy-05-07-26-11-51-13, Vancouver School of Economics, revised 25 Feb 2014.
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