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Risk Aversion and Incentives


  • Marie-Cécile Fagart
  • Claude Fluet


We consider decision-makers facing a risky wealth prospect. The probability distribution depends on pecuniary effort, e.g., the amount invested in a venture or prevention expenditures to protect against accidental losses. We provide necessary local conditions and sufficient global conditions for greater risk aversion to induce more (or less) investment or to have no effect. We apply our results to incentives in the principal-agent framework when differently risk averse agents face the same monetary incentives.

Suggested Citation

  • Marie-Cécile Fagart & Claude Fluet, 2014. "Risk Aversion and Incentives," Cahiers de recherche 1405, CIRPEE.
  • Handle: RePEc:lvl:lacicr:1405

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    Expected utility; risk aversion; comparative statics; mean utility preserving increase in risk; location independent risk;

    JEL classification:

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

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