Locally Greater Vulnerability to Background Risk

Donald Keenan and Arthur Snow
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Arthur Snow: Department of Economics, University of Georgia, Athens, Georgia 30602, USA, e-mail: snow@terry.uga.edu

The Geneva Risk and Insurance Review, 2003, vol. 28, issue 2, 172 pages

Abstract: Willingness to take on risk is influenced by the presence of fair and unfair background risks for decision makers who are risk vulnerable as defined by Gollier and Pratt [1996], for these decision makers are more risk averse when they possess such an uninsurable background risk. We present an alternative derivation of the index of local vulnerability based on Diamond and Stiglitz [1974] compensated increases in risk, such that risk aversion increases with the introduction of any small fair background risk if and only if the index of local vulnerability is positive. We establish that the increase in risk aversion is greater for those who are more vulnerable as measured by the index of local vulnerability. The Geneva Papers on Risk and Insurance Theory (2003) 28, 161–172. doi:10.1023/A:1026344905367

Date: 2003
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