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The Pareto-Efficient Relativity of Relative Risk Aversion

Author

Listed:
  • David Eagle

    (Eastern Washington University)

Abstract

In a pure-exchange economy involving one perishable consumption good and risk-averse consumers, the elasticity of a consumer’s Pareto-efficient consumption with respect to aggregate output equals the reciprocal of the ratio of the consumer’s coefficient of relative risk aversion to average relative risk aversion. Therefore, this elasticity is unity for someone with average relative risk aversion, whereas consumers with above average relative risk aversion transfer some of their aggregate- output risk to consumers with below average relative risk aversion. This result has important implications on the financial securities needed to complete markets, inflation indexing, and central bank goals and targeting objectives.

Suggested Citation

  • David Eagle, 2005. "The Pareto-Efficient Relativity of Relative Risk Aversion," Microeconomics 0509004, EconWPA.
  • Handle: RePEc:wpa:wuwpmi:0509004
    Note: Type of Document - pdf; pages: 20. This deals with Arrow- Debreu pure-exchange economies without storage.
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mic/papers/0509/0509004.pdf
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    References listed on IDEAS

    as
    1. David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, EconWPA.
    2. Zvi Bodie & Alex Kane & Robert McDonald, 1985. "Inflation and the Role of Bonds in Investor Portfolios," NBER Chapters,in: Corporate Capital Structures in the United States, pages 167-196 National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    state-contingent securities; Arrow-Debreu economy; Pareto efficiency; relative risk aversion;

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • D3 - Microeconomics - - Distribution
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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