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Diffidence Theorem, State-Dependent Preferences, and DARA*

Author

Listed:
  • Georges Dionne

    (Risk Management Chair, HEC—Montréal and CRT, Université de Montréal)

  • Marie-Gloriose Ingabire

    (Health Canada)

Abstract

C. Gollier (The Economics of Risk and Time. Cambridge: MIT Press, 2001) has developed a standard technique based on the diffidence theorem. This theorem provides a very simple instrument to solve relatively sophisticated problems when preferences are state-independent. The object of this article is to show that the theorem is also very useful to derive significant results with state-dependent preferences. Using the reference set notion and an extension of the diffidence theorem, we establish formally necessary and sufficient conditions on the reference set, in order to obtain prudence and decreasing absolute risk aversion. Examples of DARA utility functions compatible with non-linear reference sets are presented in the Appendix. The Geneva Papers on Risk and Insurance Theory (2001) 26, 139–154. doi:10.1023/A:1014334614157

Suggested Citation

  • Georges Dionne & Marie-Gloriose Ingabire, 2001. "Diffidence Theorem, State-Dependent Preferences, and DARA*," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 26(2), pages 139-154, September.
    • Handle: RePEc:pal:genrir:v:26:y:2001:i:2:p:139-154
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    Citations

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    Cited by:

    1. Pascal St-Amour, 2004. "Ratchet vs Blasé Investors and Asset Markets," CIRANO Working Papers 2004s-11, CIRANO.
    2. Christian Gollier & Miles S. Kimball, 2018. "Toward a Systematic Approach to the Economic Effects of Risk: Characterizing Utility Functions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(2), pages 397-430, June.
    3. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.

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