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

  • Hara, Chiaki
  • Huang, James
  • Kuzmics, Christoph

We study the representative consumer's risk attitude and efficient risk-sharing rules in a singleperiod, 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. Furthermore, we discuss some consequences of these results and refinements of these results for the class of HARA utility functions.

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Paper provided by Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University in its series Discussion Paper with number 323.

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Length: 27 p.
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:hit:piedp2:323
Note: November 6, 2006
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  6. Chiaki Hara, 2005. "Heterogeneous Risk Attitudes in a Continuous-Time Model," KIER Working Papers 609, Kyoto University, Institute of Economic Research.
  7. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
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  16. Kurosaki, Takashi, 2001. "Consumption Smoothing and the Structure of Risk and Time Preferences:Theory and Evidence from Village India," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 42(2), pages 103-117, December.
  17. Dumas, Bernard, 1989. "Two-Person Dynamic Equilibrium in the Capital Market," Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 157-88.
  18. James Huang, 2003. "Impact of Divergent Consumer Confidence on Option Prices," Review of Derivatives Research, Springer, vol. 6(3), pages 165-177, October.
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