The Pareto-Efficient Relativity of Relative Risk Aversion
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.
|Date of creation:||12 Sep 2005|
|Date of revision:|
|Note:||Type of Document - pdf; pages: 20. This deals with Arrow- Debreu pure-exchange economies without storage.|
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- Zvi Bodie & Alex Kane & Robert McDonald, 1985.
"Inflation and the Role of Bonds in Investor Portfolios,"
in: Corporate Capital Structures in the United States, pages 167-196
National Bureau of Economic Research, Inc.
- Zvi Bodie & Alex Kane & Robert L. McDonald, 1983. "Inflation and the Role of Bonds in Investor Portfolios," NBER Working Papers 1091, National Bureau of Economic Research, Inc.
- David Eagle, 2005. "Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities," Finance 0501009, EconWPA.
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