Second-Best Risk Sharing With Incomplete Contracts
We analyze in this paper the effect of age on the optimal dynamic strategy towards repeated independent gambles. When deciding to accept or to reject a lottery that is offered today, the gambler knows how many future lotteries can yet be played in the future. We first examine under which condition on the utility function the option to gamble in the future decreases aversion to current risks. We also characterize the optimal dynamic strategy when future lotteries are identically distributed and absolute risk aversion is decreasing. This analysis can be applied to the problem of investing in indivisible risky investment projects, or to the problem of dynamic optimal insurance demand. \
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|Date of creation:||Apr 1994|
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- Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-154, January.
- Eeckhoudt, Louis & Gollier, Christian & Levasseur, Michel, 1993. "The Economics of Adding and Subdividing Independent Risks: Some Comparative Statics Results," Journal of Risk and Uncertainty, Springer, vol. 7(3), pages 325-337, December.
- Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
- McCardle, Kevin F. & Winkler, Robert L., 1989. "All Roads Lead to Risk Preference: A Turnpike Theorem for Conditionally Independent Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(01), pages 13-28, March.
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