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Strategic Risk Aversion

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  • SHerrill Shaffer

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Abstract

This paper demonstrates that exaggerated risk aversion may comprise a rational form of strategic behavior in the face of asymmetric information. Unlike some other forms of strategic behavior analyzed previously, this behavior confers a benefit in the form of higher ex post consumption (not merely higher expected consumption or expected utility) and whether or not markets are perfectly competitive. Such behavior might help explain historically large equity premia.

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File URL: http://cbe.anu.edu.au/research/papers/camawpapers/Papers/2008/Shaffer_252008.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2008-25.

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Length: 21 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:een:camaaa:2008-25
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  1. Gadi Barlevy & Pietro Veronesi, . "Information Acquisition in Financial Markets," CRSP working papers 484, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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  17. Sobel, Joel, 1981. "Distortion of Utilities and the Bargaining Problem," Econometrica, Econometric Society, vol. 49(3), pages 597-619, May.
  18. B. Douglas Bernheim & Michael D. Whinston, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, Oxford University Press, vol. 101(1), pages 1-31.
  19. Martin J Osborne & Ariel Rubinstein, 2009. "A Course in Game Theory," Levine's Bibliography 814577000000000225, UCLA Department of Economics.
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