Changes in Background Risk and Risk Taking Behavior

Louis Eeckhoudt, Christian Gollier () and Harris Schlesinger

Working Papers from Risk and Insurance Archive

Abstract: We consider the effects of changes in the distribution of a background risk on the optimal risk taking behaviour of a risk- averse decision maker. In particular, we suppose that the background risk deteriorates via a first- or second-degree stochastic dominance shift. Our contention is that such a change in background wealth should lead the individual to behave in a more risk-averse manner in decisions concerning any other independent risk. We examine conditions on preferences that are both necessary and sufficient for all FSD or SSD changes in background wealth to entail this property. These conditions place restrictions on the stronger measure of risk aversion defined by Ross [1981].

Keywords: background risk; properness; strong risk aversion. (search for similar items in EconPapers)
Date: 1994-06
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Citations: View citations in EconPapers (30)

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Related works:
Journal Article: Changes in Background Risk and Risk-Taking Behavior (1996)
Working Paper: Changes in Background Risk and Risk Taking Behavior (1992)
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