The Comparative Statics for Linear Payoffs and Increases in Risk

Iltae Kim and Suyeol Ryu
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Iltae Kim: Chonnam National University
Suyeol Ryu: Busan Development Institute

Korean Economic Review, 2006, vol. 22, 437-459

Abstract: This paper introduces a concept for the subset of K-L-L-S increases in risk defined by Kroll, Leshno, Levy, and Spector (1995; called K-L-L-S); a ‘relatively strong increase in risk in the K-L–L-S sense’ (RSIRK). Our new notion of K-L-L-S increases in risk extends the Rothschild-Stiglitz definition of risk to a larger set of cumulative distribution functions, but use somewhat stronger restrictions on the structure of the decision model and the set of decision-makers. The decision model used in this paper consists of a utility function of one scalar variable that is affected by one-dimensional choice variable (and another random variable) to avoid problems involving multidimensionality. We show that, by restricting the payoff function to be linear in the random variable ( 0 = xx z ) and limiting our analysis to decisionmakers who are prudnet ( 0 ≥ ′ u ), we are able to generate comparative statics results for the RSIRK order.

Keywords: Kroll; Leshno; Levy; and Spector (K-L-L-S) increases in risk; Relatively strong increases in risk; Relatively strong increases in risk in the K-L-L-S sense; Linear payoffs; Prudence (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2006
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