Comparative mixed risk aversion: Definition and application to self-protection and willingness to pay

Kais Dachraoui, Georges Dionne (georges.dionne@hec.ca), Louis Eeckhoudt and Philippe Godfroid
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Kais Dachraoui: Statistics Canada
Louis Eeckhoudt: Université catholique de Louvain
Philippe Godfroid: Université catholique de Louvain

No 03-2, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: We analyze the optimal choices of agents with utility functions whose derivatives alternate in sign, an important class that includes most of the functions commonly used in economics and finance (Mixed Risk Aversion, MRA, Caballé and Pomansky, 1996). We propose a comparative mixed risk aversion definition for this class of utility functions, namely, ''More Risk Averse MRA'', and provide a sufficient condition to compare individuals. We apply the model to optimal prevention and willingness to pay. More risk averse MRA agents spend less to reduce accident probabilities that are above ½. They spend more only when accident probabilities are below ½. Explanations in terms of risk premiums are provided. The results presented also allow for the presence of background risk.

Keywords: Mixed risk aversion; more risk averse MRA; self-protection; willingness to pay; background risk (search for similar items in EconPapers)
JEL-codes: D80 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2004-04-01
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Related works:
Journal Article: Comparative Mixed Risk Aversion: Definition and Application to Self-Protection and Willingness to Pay (2004)
Working Paper: Comparative mixed risk aversion: definition and application to self-protection and willingness to pay (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2003_002

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