RISK AND PROBABILITY PREMIUMS FOR CARA UTILITY FUNCTIONS

Bruce Babcock, Eun Choi and Eli Feinerman

Journal of Agricultural and Resource Economics, 1993, vol. 18, issue 01, 8

Abstract: The risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Date: 1993
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Citations: View citations in EconPapers (101)

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https://ageconsearch.umn.edu/record/30810/files/18010017.pdf (application/pdf)

Related works:
Working Paper: Risk and Probability Premiums for Cara Utility Function (1993)
Working Paper: Risk and Probability Premiums for CARA Utility Functions (1993)
Working Paper: Risk and Probability Premiums for CARA Utility Functions (1993)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:jlaare:30810

DOI: 10.22004/ag.econ.30810

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