OPTIMAL DECISIONS WITH LINEAR RANDOM PAYOFF*

Carmen F. Menezes and X. Wang ()

Manchester School, 2006, vol. 74, issue 3, 251-265

Abstract: This paper provides a unified analysis of decision under uncertainty with payoffs that are linear in the random variable. This class involves additive as well as multiplicative risks and is widely used in the literature. The total effect of an increase in risk on choice is decomposed into an income effect and a substitution effect. Properties of preferences that control the sign of these effects are identified.

Date: 2006
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