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Supermodularity and Risk Aversion

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  • Quiggin, John
  • Chambers, Robert G.

Abstract

In this paper, we consider the relationship between supermodularity and risk aversion. We show that supermodularity of the certainty equivalent implies that the certainty equivalent of any random variable is less than its mean. We also derive conditions under which supermodularity of the certainty equivalent is equivalent to aversion to mean-preserving spreads in the sense of Rothschild and Stiglitz.

Suggested Citation

  • Quiggin, John & Chambers, Robert G., 2004. "Supermodularity and Risk Aversion," Risk and Sustainable Management Group Working Papers 151161, University of Queensland, School of Economics.
    • Handle: RePEc:ags:uqsers:151161
    DOI: 10.22004/ag.econ.151161
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    References listed on IDEAS

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    1. repec:bla:econom:v:44:y:1977:i:176:p:351-58 is not listed on IDEAS
    2. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
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    6. Quiggin, John & Chambers, Robert G, 1998. "Risk Premiums and Benefit Measures for Generalized-Expected-Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 121-137, November.
    7. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    8. Susan Athey, 2002. "Monotone Comparative Statics under Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 187-223.
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    Cited by:

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    2. Marta Cardin & Maddalena Manzi, 2006. "A copula-based approach to aggregation functions," Working Papers 139, Department of Applied Mathematics, Università Ca' Foscari Venezia.

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    More about this item

    Keywords

    Environmental Economics and Policy; Risk and Uncertainty;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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