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On the properties of non-monetary measures for risks

Author

Listed:
  • Christophe Courbage

    (Geneva School of Business Administration, University of Applied SciencesWestern Swizterland (HESSO))

  • Henri Loubergé

    (University of Geneva, Geneva School of Economics and Management, Swiss Finance Institute)

  • Béatrice Rey

    () (Univ Lyon, Université Lumière Lyon 2, GATE L-SE UMR 5824, F-69130 Ecully, France)

Abstract

This paper investigates how welfare losses for facing risks change as the risk environment of the decision-maker is altered. To that aim, we define the risk apportionment of order n (RA-n) utility premium as a measure of pain associated with facing the passage from one risk to a riskier one. Changes in risks are expressed through the concept of stochastic dominance of order n. Three configurations of risk exposures are considered. The paper first shows how the RA-n utility premium is modified when initial wealth becomes riskier. Second, the paper provides conditions on individual preferences for superadditivity of the RA-n utility premium. Third, the paper investigates welfare changes of merging increases in risks. These results offer new interpretations of the sign of higher derivatives of the utility function.

Suggested Citation

  • Christophe Courbage & Henri Loubergé & Béatrice Rey, 2017. "On the properties of non-monetary measures for risks," Working Papers 1710, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
  • Handle: RePEc:gat:wpaper:1710
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    References listed on IDEAS

    as
    1. Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, vol. 96(1), pages 280-289, March.
    2. Eeckhoudt, L. & Bauwens, L. & Briys, E. & Scarmure, P., 1990. "The Law Of Large (Small?) Numbers And The Demand For Insurance," G.R.E.Q.A.M. 90a03, Universite Aix-Marseille III.
    3. Eeckhoudt, Louis & Schlesinger, Harris & Tsetlin, Ilia, 2009. "Apportioning of risks via stochastic dominance," Journal of Economic Theory, Elsevier, vol. 144(3), pages 994-1003, May.
    4. Eeckhoudt, L. & Gollier, C., 1998. "Which Shape for the Cost Curve of Risk?," Papers 98.490, Toulouse - GREMAQ.
    5. Ekern, Steinar, 1980. "Increasing Nth degree risk," Economics Letters, Elsevier, vol. 6(4), pages 329-333.
    6. Eeckhoudt, Louis & Schlesinger, Harris, 2009. "On the utility premium of Friedman and Savage," Economics Letters, Elsevier, vol. 105(1), pages 46-48, October.
    7. Patrick L. Brockett & Linda L. Golden, 1987. "A Class of Utility Functions Containing all the Common Utility Functions," Management Science, INFORMS, vol. 33(8), pages 955-964, August.
    8. David Crainich & Louis Eeckhoudt, 2008. "On the intensity of downside risk aversion," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 267-276, June.
    9. Lajeri-Chaherli, Fatma, 2004. "Proper prudence, standard prudence and precautionary vulnerability," Economics Letters, Elsevier, vol. 82(1), pages 29-34, January.
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    More about this item

    Keywords

    risk apportionment; superadditivity; RA-n utility premium;

    JEL classification:

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

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