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

  • Chiaki Hara

    ()

    (Institute of Economic Research, Kyoto University)

  • James Huang

    ()

    (Department of Accounting and Management, Lancaster University Management School)

  • Christoph Kuzmics

    ()

    (MEDS, Kellogg School of Management, Northwestern University)

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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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP620.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 620.

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Length: 26pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:kyo:wpaper:620
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  1. James Huang, 2003. "Impact of Divergent Consumer Confidence on Option Prices," Review of Derivatives Research, Springer, vol. 6(3), pages 165-177, October.
  2. Laurent Calvet & Jean-Michel Grandmont & Isabelle Lemaire, 2001. "Aggregation of Heterogenous Beliefs and Asset Pricing in Complete Financial Markets," Working Papers 2001-01, Centre de Recherche en Economie et Statistique.
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  6. Hara, Chiaki & Huang, James & Kuzmics, Christoph, 2007. "Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules," Discussion Paper 323, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  7. Chiaki Hara, 2006. "Heterogeneous Risk Attitudes In A Continuous-Time Model," The Japanese Economic Review, Japanese Economic Association, vol. 57(3), pages 377-405.
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