Multiplicative background risk
Günter Franke (),
Harris Schlesinger and
Richard C. Stapleton
No FS IV 02-06, Discussion Papers, various Research Units from WZB Berlin Social Science Center
We consider random wealth of the multiplicative form xy, where x and y are statistically independent random variables. We assume that x is endogenous to the economic agent, but that y is an exogenous and uninsurable background risk. Our main focus is on how the randomness of y affects risk-taking behavior for decisions on the choice of x. We characterize conditions on preferences that lead to more cautious behavior. We also develop the concept of the affiliated utility function, which we define as the composition of the underlying utility function and the exponential function. This allows us to adapt several results for additive background risk to the multiplicative case.
Keywords: background risk; standard risk aversion; affiliated utility function (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Journal Article: Multiplicative Background Risk (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:zbw:wzbdiv:fsiv0206
Access Statistics for this paper
More papers in Discussion Papers, various Research Units from WZB Berlin Social Science Center Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().