On the Theory of Risk Aversion

Menezes, Carmen F.; Hanson, D. L.

doi:10.2307/2525326

Cited by 146 publications

(76 citation statements)

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“…In most of the literature, the ex ante wealth levels are implicitly set equal to zero to focus on the contract itself, 7 We allow for the possibility that both the principal and the agent are risk averse based on Holt and Laury's (2002) conclusion that "clear evidence for risk aversion, even with low stakes, suggests the potential danger of analyzing behavior under the simplifying assumption of risk neutrality." but our focus on wealth effects requires that they be incorporated in the utility function, as in Menezes and Hanson (1970) and Zeckhauser and Keeler (1970), and more recently in Meyer and Meyer (2005) and Guo and Ou-Yang (2006). 8 Finally, the agent's reservation utility isŪ = U(z a ), which accounts for the fact that the agent receives his ex ante wealth regardless of whether he participates in the contract or not.…”

Section: A Principal-agent Model With Exogenous Wealthmentioning

confidence: 99%

On the (Mis)Use of Wealth as a Proxy for Risk Aversion

Bellemare

Brown

2010

American J Agri Economics

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Tests of risk sharing in the contracting literature often rely on wealth as a proxy for risk aversion. The intuition behind these tests is that since contract choice is monotonic in the coefficients of risk aversion, which are themselves assumed monotonic in wealth, the effect of a change in wealth on contract choice is clearly identified. We show that tests of risk sharing relying on wealth as a proxy for risk aversion are identified only insofar as the econometrician is willing to assume that (a) the principal is risk neutral or her preferences exhibit constant absolute risk aversion (CARA); and (b) the agent is risk neutral.

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Section: A Principal-agent Model With Exogenous Wealthmentioning

confidence: 99%

On the (Mis)Use of Wealth as a Proxy for Risk Aversion

Bellemare

Brown

2010

American J Agri Economics

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“…DARA implies that decreases with wealth, which could account for rich households choosing higher deductibles than poor households. If the utility function also exhibits IRRA/CRRA/DRRA, 15 then, ceteris paribus, is increasing/constant/decreasing in stakes (Menezes and Hanson 1970;Zeckhauser and Keeler 1970). Thus, the right kind of heterogeneity in relative risk aversion (e.g., rich households have IRRA and poor households have CRRA) could account for rich households also choosing higher liability limits than poor households.…”

Section: Discussionmentioning

confidence: 99%

Different Contexts, Different Risk Preferences?

Barseghyan

Teitelbaum

2018

SSRN Journal

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We examine the stability of risk preferences across contexts involving di¤erent stakes. Using data on households' deductible choices in three property insurance coverages and their limit choices in two liability insurance coverages, we assess the stability across the …ve contexts in the ordinal ranking of the households' willingness to bear risk. We …nd evidence of stability across contexts involving stakes of the same magnitude, but not across contexts involving stakes of very di¤erent magnitudes. Our results appear to be robust to heterogeneity in wealth and access to credit, complicating seemingly ready explanations. (JEL D12, D81, G22)

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“…For n = 1 this yields the index of partial relative risk aversion as introduced by Menezes and Hanson (1970). R 2 and R 3 are, respectively, the indices of partial relative prudence (Choi et al, 2001) and partial relative temperance (Honda, 1985).…”

Section: Parallelsmentioning

confidence: 99%