Standard Risk Aversion and Efficient Risk Sharing

Suen, Richard M. H. (2018): Standard Risk Aversion and Efficient Risk Sharing.

Abstract

This paper analyzes the risk attitude and investment behavior of a group of heterogeneous consumers who face an undesirable 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Standard risk aversion; Efficient risk sharing; Background risk; Portfolio choice.
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D70 - General; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

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