Risk-Neutrality versus Risk A version in a Model of Production Efficiency under Uncertainty

Robert Kohn

International Economic Journal, 1999, vol. 13, issue 1, 71-79

Abstract: In an economy in which pollution from one sector is multiplicatively and stochastically damaging to another sector, there is efficiency when the expected ratio of the marginal rate of substitution to the marginal rate of transformation equals unity. When this ratio of variables is decomposed, the expected marginal rate of substitution approximately equals the expected marginal rate of transformation minus a correction based on covariance and a second correction based on variance. Under one definition of risk-neutrality both corrections vanish, whereas under another definition, it is only the correction based on covariance that vanishes. [Q25]

Date: 1999
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DOI: 10.1080/10168739900000030

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