A Reconsideration of Arrow-Lind: Risk Aversion, Risk Sharing, and Agent Choice
We consider the original Arrow-Lind framework in which a government undertakes a risky project to be shared among many taxpayers. In our model, the taxpayers decide the level of participation in the risky project. Moreover, the amount of taxes collected by the government fully finances the public project. In this case, we show that projects cannot be evaluated only on the basis of expected benefits since the resulting tax determined by the model is incompatible with any risk sharing.
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- Leonard J. Mirman & Marc Santugini, 2008.
"Firms, Shareholders, and Financial Markets,"
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08-05, HEC Montréal, Institut d'économie appliquée, revised Mar 2013.
- Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, vol. 60(3), pages 364-78, June.
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