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Standard Risk Aversion and Efficient Risk Sharing

Author

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  • Suen, Richard M. H.
Abstract
This paper analyzes the risk attitude and investment behavior of a group of heterogeneous consumers who face an uninsurable background risk. It is shown that standard risk aversion at the individual level does not imply standard risk aversion at the group level under efficient risk sharing. This points to a potential divergence between individual and collective investment choices in the presence of background risk. We show that if the members' absolute risk tolerance is increasing and satisfies a strong form of concavity, then the group has standard risk aversion.

Suggested Citation

  • Suen, Richard M. H., 2018. "Standard Risk Aversion and Efficient Risk Sharing," MPRA Paper 88881, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:88881
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    References listed on IDEAS

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    More about this item

    Keywords

    Standard risk aversion; Efficient risk sharing; Background risk; Portfolio choice.;
    All these keywords.

    JEL classification:

    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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