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On the (Mis)Use of Wealth as a Proxy for Risk Aversion


  • Marc F. Bellemare
  • Zachary S. Brown


Tests of risk sharing in the contracting literature often rely on wealth as a proxy for risk aversion. The intuition behind these tests is that since contract choice is monotonic in the coefficients of risk aversion, which are themselves assumed monotonic in wealth, the effect of a change in wealth on contract choice is clearly identified. We show that tests of risk sharing relying on wealth as a proxy for risk aversion are identified only insofar as the econometrician is willing to assume that (a) the principal is risk neutral or her preferences exhibit constant absolute risk aversion (CARA); and (b) the agent is risk neutral. Copyright 2010, Oxford University Press.

Suggested Citation

  • Marc F. Bellemare & Zachary S. Brown, 2010. "On the (Mis)Use of Wealth as a Proxy for Risk Aversion," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(1), pages 273-282.
  • Handle: RePEc:oup:ajagec:v:92:y:2010:i:1:p:273-282

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    References listed on IDEAS

    1. Erdem, Tulin & Keane, Michael P. & Sun, Baohong, 1998. "Missing price and coupon availability data in scanner panels: Correcting for the self-selection bias in choice model parameters," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 177-196, November.
    2. Diansheng Dong & Brian W. Gould, 2000. "Quality versus quantity in Mexican household poultry and pork purchases," Agribusiness, John Wiley & Sons, Ltd., vol. 16(3), pages 333-355.
    3. Steven T. Yen & Andrew M. Jones, 1997. "Household Consumption of Cheese: An Inverse Hyperbolic Sine Double-Hurdle Model with Dependent Errors," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 246-251.
    4. Goodwin, Barry K., 1992. "An Analysis Of Factors Associated With Consumers' Use Of Grocery Coupons," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(01), July.
    5. Diansheng Dong & J.S. Shonkwiler & Oral Capps, 1998. "Estimation of Demand Functions Using Cross-Sectional Household Data: The Problem Revisited," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(3), pages 466-473.
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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. The Economics of Malaria Vector Control
      by Marc F. Bellemare in Marc F. Bellemare on 2012-11-14 16:00:39


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    Cited by:

    1. Bellemare, Marc F., 2009. "The (Im)Possibility of Reverse Share Tenancy," MPRA Paper 23681, University Library of Munich, Germany.
    2. Marc F. Bellemare, 2012. "Insecure Land Rights and Share Tenancy: Evidence from Madagascar," Land Economics, University of Wisconsin Press, vol. 88(1), pages 155-180.
    3. Franken, Jason R.V. & Pennings, Joost M.E. & Garcia, Philip, 2012. "Measuring Risk Attitude and Relation to Marketing Behavior," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124471, Agricultural and Applied Economics Association.
    4. Bellemare, Marc F., 2010. "Insecure Land Rights and Share Tenancy in Madagascar," MPRA Paper 23640, University Library of Munich, Germany.
    5. Liu, Elaine M. & Huang, JiKun, 2013. "Risk preferences and pesticide use by cotton farmers in China," Journal of Development Economics, Elsevier, vol. 103(C), pages 202-215.
    6. Steven C. Blank & Danny Klinefelter, 2012. "Keeping ARMS relevant: increasing its usability," Agricultural Finance Review, Emerald Group Publishing, vol. 72(2), pages 222-232, July.
    7. Cho, In Soo, 2013. "Are Risk Attitudes Fixed Factors or Fleeting Feelings?," Staff General Research Papers Archive 35751, Iowa State University, Department of Economics.

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