Érudit | Dépôt de documents >
CIRPÉE - Centre interuniversitaire sur le risque, les politiques économiques et l'emploi >
Cahiers de recherche du CIRPÉE >

Please use this identifier to cite or link to this item:

Title: On Risk Aversion, Classical Demand Theory, and KM Preferences
Authors: Mirman, Leonard J.
Santugini, Marc
Keywords: Classical Demand Theory
Consumer choice
Risk aversion
Income and Substitution Effects
Issue Date: 2011-10
Series/Report no.: Cahiers du CIRPÉE;11-32
Abstract: Building on Kihlstrom and Mirman (1974)’s formulation of risk aversion in the case of multidimensional utility functions, we study the effect of risk aversion on optimal behavior in a general consumer’s maximization problem under uncertainty. We completely characterize the relationship between changes in risk aversion and classical demand theory. We show that the effect of risk aversion on optimal behavior is determined not by the riskiness of the risky good, but rather the riskiness of the utility gamble associated with each decision. We also discuss the appropriateness of an (alternative) approach to study risk aversion suggested by Selden (1978), which has been widely popularized in the field of macroeconomics through the parametric model of Epstein and Zin (1989) (henceforth, the Selden-EZ approach). We show that the Selden-EZ approach cannot disentangle risk aversion from tastes, and, thus, cannot be used to isolate the effect of risk aversion.
Appears in Collections:Cahiers de recherche du CIRPÉE

Files in This Item:

CIRPEE11-32.pdf, (Adobe PDF ; 311.41 kB)

Items in the Repository are protected by copyright, with all rights reserved, unless otherwise indicated.


About Érudit | Subscriptions | RSS | Terms of Use | Contact us |

Consortium Érudit ©  2016