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Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules

  • Hara, C.
  • Christoph Kuzmics

We study the representative consumer's risk attitude and efficient risk-sharing rules in a single-period, single-good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes. We prove that if all consumers have convex absolute risk tolerance, so must the representative consumer. We also identify a relationship between the curvature of an individual consumer's individual risk sharing rule and his absolute cautiousness, the first derivative of absolute risk-tolerance. Some consequences of these results and refinements of these results for the class of HARA utility functions are discussed.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0452.

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Length: 29
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:cam:camdae:0452
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