Risk Aversion in the Small and in the Large. When Outcomes are Multidimensional

Hellwig, Martin

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Risk Aversion in the Small and in the Large. When Outcomes are Multidimensional

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Hellwig, Martin
Max Planck Institute for Research on Collective Goods, Max Planck Society;

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http://www.coll.mpg.de/pdf_dat/2004_06online.pdf
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Citation

Hellwig, M. (2004). Risk Aversion in the Small and in the Large. When Outcomes are Multidimensional.

Cite as: https://hdl.handle.net/11858/00-001M-0000-0028-6E5C-1

Abstract

The paper discusses criteria for comparing risk aversion of decision makers when outcomes are multidimensional. A weak concept, "commodity specific greater risk aversion", is based on the comparison of risk premia paid in a specified commodity. A stronger concept, "uniformly greater risk aversion" is based on the comparison of risk premia regardless of what commodities are used for payment. Neither concept presumes that von Neumann-Morgenstern utility functions are ordinally equivalent. Nonincreasing consumption specific risk aversion is shown to be sufficient to make randomization undesirable in an agency problem with hidden characteristics.