Loss Aversion and State-Dependent Linear Utility Functions for Monetary Returns

Somdeb Lahiri

Papers from arXiv.org

Abstract: We present a theory of expected utility with state-dependent linear utility functions for monetary returns, that incorporates the possibility of loss-aversion. Our results relate to first order stochastic dominance, mean-preserving spread, increasing-concave linear utility profiles and risk aversion. As an application of the expected utility theory developed here, we analyze the contract that a monopolist would offer in an insurance market that allowed for partial coverage of loss.

Date: 2024-10, Revised 2024-11
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