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Fair management of social risk

We provide a general method for extending fair social preferences defined for riskless economic environments to the context of risk and uncertainty. We apply the méthod to the problems of managing unemployment allowances (in the context of macroeconomic fluctuations) and catastrophic risks (in the context of climate change). It requires paying attention to individuals' risk attitudes and rationality properties of social preferences, revisiting basic ideas from Harsanyi's seminal work (Harsanyi, 1995). The social preferences that we obtain do not in general take the form of an expected utility criterion, but they always satisfy statewise dominance. We also show how non-expected utility individual preferences can be accommodated in the approach.

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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 14016.

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Length: 40 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:mse:cesdoc:14016
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  1. Mongin, P., . "Consistent Bayesian aggregation," CORE Discussion Papers RP -1176, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Mark J. Machina & David Schmeidler, 1990. "A More Robust Definition of Subjective Probability," Discussion Paper Serie A 306, University of Bonn, Germany.
  3. Simon Grant & Hatice Ozsoy & Ben Polak, 2007. "Probabilistic Sophistication and Stochastic Monotonicity in the Savage Framework," Levine's Bibliography 122247000000001390, UCLA Department of Economics.
  4. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
  5. Walter Nicholson & Karen Needels, 2006. "Unemployment Insurance: Strengthening the Relationship between Theory and Policy," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 47-70, Summer.
  6. Dreze, J. & Gollier, C., 1990. "Risk-sharing on the labour market and second-best wage rigidities," CORE Discussion Papers 1990067, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Robert S. Pindyck & Neng Wang, 2013. "The Economic and Policy Consequences of Catastrophes," American Economic Journal: Economic Policy, American Economic Association, vol. 5(4), pages 306-39, November.
  8. Mongin, Philippe, 1998. "The paradox of the Bayesian experts and state-dependent utility theory," Journal of Mathematical Economics, Elsevier, vol. 29(3), pages 331-361, April.
  9. Simon Grant & Atsushi Kajii & Ben Polak & Zvi Safra, 2006. "Generalized Utilitarianism and Harsanyi's Partial Observer Theorem," Levine's Bibliography 321307000000000419, UCLA Department of Economics.
  10. Kihlstrom, Richard E. & Mirman, Leonard J., 1974. "Risk aversion with many commodities," Journal of Economic Theory, Elsevier, vol. 8(3), pages 361-388, July.
  11. Thibault Gajdos & Eric Maurin, 2004. "Unequal Uncertainties and Uncertain Inequalities: An Axiomatic Approach," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00085940, HAL.
  12. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
  13. Itzhak Gilboa & Dov Samet & David Schmeidler, 2004. "Utilitarian Aggregation of Beliefs and Tastes," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 932-938, August.
  14. Antony Millner, 2013. "On Welfare Frameworks and Catastrophic Climate Risks," CESifo Working Paper Series 4442, CESifo Group Munich.
  15. De Meyer, B. & Mongin, P., . "A note on affine aggregation," CORE Discussion Papers RP -1136, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. repec:mpr:mprres:5070 is not listed on IDEAS
  17. Marc Fleurbaey, 2009. "Assessing risky social situations," LSE Research Online Documents on Economics 27006, London School of Economics and Political Science, LSE Library.
  18. repec:hal:journl:halshs-00085940 is not listed on IDEAS
  19. Ben-Porath, Elchanan & Gilboa, Itzhak & Schmeidler, David, 1997. "On the Measurement of Inequality under Uncertainty," Journal of Economic Theory, Elsevier, vol. 75(1), pages 194-204, July.
  20. Chambers, Christopher P. & Echenique, Federico, 2012. "When does aggregation reduce risk aversion?," Games and Economic Behavior, Elsevier, vol. 76(2), pages 582-595.
  21. Millner, Antony, 2013. "On welfare frameworks and catastrophic climate risks," Journal of Environmental Economics and Management, Elsevier, vol. 65(2), pages 310-325.
  22. Marc Fleurbaey, 2005. "Health, Wealth, and Fairness," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(2), pages 253-284, 05.
  23. Peter A. Diamond, 1967. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparison of Utility: Comment," Journal of Political Economy, University of Chicago Press, vol. 75, pages 765.
  24. Epstein, Larry G & Segal, Uzi, 1992. "Quadratic Social Welfare Functions," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 691-712, August.
  25. Blackorby, Charles & Donaldson, David & Weymark, John A., 1999. "Harsanyi's social aggregation theorem for state-contingent alternatives1," Journal of Mathematical Economics, Elsevier, vol. 32(3), pages 365-387, November.
  26. Christian Gollier, 1991. "Unemployment Insurance: Risk Sharing Versus Efficiency," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 16(1), pages 59-74, June.
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