Calibrating the wealth effects of decoupled payments: Does decreasing absolute risk aversion matter?

David Just

Journal of Econometrics, 2011, vol. 162, issue 1, 25-34

Abstract: Arrow's hypotheses regarding the relationship between wealth and risk aversion measures have formed the basis for a large body of empirical research and theory. For example, many have suggested that decoupled farm subsidy payments may increase production as they decrease farmers' risk aversion. This paper develops a new calibration technique designed to measure the minimum change in concavity of a utility of wealth function necessary to describe a particular change in production behavior for some discrete change in wealth. I conclude that measurable changes in production levels should not be produced by changing levels of risk aversion except when wealth changes are a substantial portion of wealth. This tool draws into question the usefulness of Arrow's hypotheses in many current applications.

Keywords: Decreasing; absolute; risk; aversion; Calibration; Diminishing; marginal; utility; of; wealth; Arrow-Pratt; risk; aversion (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:162:y:2011:i:1:p:25-34

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