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Risk and Probability Premiums for Cara Utility Function

  • Babcock, Bruce A.
  • Choi, E. Kwan
  • Feinerman, Eli

The risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 596.

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Date of creation: 01 Jul 1993
Date of revision:
Publication status: Published in Journal of Agricultural and Resource Economics, July 1993, vol. 18 no. 1, pp. 17-24
Handle: RePEc:isu:genres:596
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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  1. King, Robert P. & Lybecker, Donald W., 1983. "Flexible, Risk-Oriented Marketing Strategies For Pinto Bean Producers," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 8(02), December.
  2. repec:cdl:agrebk:1141583 is not listed on IDEAS
  3. Yassour, Joseph & Zilberman, David & Rausser, Gordon C, 1980. "Optimal choices among alternative technologies with stochastic yield," CUDARE Working Paper Series 155, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  4. William T. McSweeny & Randall A. Kramer, 1986. "The Integration of Farm Programs for Achieving Soil Conservation and Nonpoint Pollution Control Objectives," Land Economics, University of Wisconsin Press, vol. 62(2), pages 159-173.
  5. Babcock, Bruce A. & Chalfant, James A. & Collender, R. N., 1987. "Simultaneous Input Demands and Land Allocation in Agricultural Production Under Uncertainty," Staff General Research Papers 10614, Iowa State University, Department of Economics.
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