Intertemporal substitution, risk aversion and ambiguity aversion

Summary. This paper axiomatizes a form of recursive utility on consumption processes that permits a role for ambiguity as well as risk. The model has two prominent special cases: (i) the recursive model of risk preference due to Kreps and Porteus [18]; and (ii) an intertemporal version of multiple-priors utility due to Epstein and Schneider [8]. The generalization presented here permits a three-way separation of intertemporal substitution, risk aversion and ambiguity aversion.Received: 5 August 2003, Revised: 12 March 2004, JEL Classification Numbers: D80, D81, D90.I am grateful to Larry Epstein for his guidance and invaluable advice, and to a referee for helpful comments and suggestions.     

Information,endogenous uncertainty and risk aversion

The importance of incomplete information and risk aversion for the allocation of economic resources is shown to depend critically on whether uncertainty is exogenously imposed or endogenously related to the ability of the price system to aggregate and disseminate the information possessed by the agents in a decentralized market economy. The specific example analysed in this paper is a two-period exchange model with competitive markets and a homogeneous product.Comments and suggestions by anonymous referees, Jacques Drèze, Jan Rose Sørensen, and financial support from the Danish Social Science Research Council are gratefully acknowledged.     

Conjectural variations,risk aversion and price-cost margins

Summary We have shown that introduction of random conjectural variations and risk aversion into an oligopoly model leads to results in line with those derived earlier for competitive and monopolistic firms. In particular, a risk-averse firm has smaller output and higher expected price-cost margin than a risk-neutral firm. For a specific form of conjectural variations we have shown that under risk aversion the firm-level expected price-cost margins depend on the market structure, measured in terms of the Herfindahl index of the rest of the firms in the industry, as well as on the expected degree of correlation between the competitors' reactions.     

Quality risk aversion, conjectures, and new product diffusion

In this paper, we provide a generalization of the standard models of the diffusion of a new product. Consumers are heterogeneous and risk averse, and the firm is uncertain about the demand curve: both learn from past observations. The attitude towards risk has important effects with regard to the diffusion pattern. In our model, downward-biased signals to consumers can prevent the success of the product, even if its objective quality is high: a “lock-in” result. We show, in addition, that the standard logistic pattern can be derived from the model. Finally, we discuss the steady states of the learning dynamics, with regard to the multiplicity and the local stability of equilibria, and to their welfare properties.     

A note on risk aversion and multivariate,state-dependent preferences

Within the multivariate, state-dependent utility framework, a full insurance specification of risk aversion places severe restrictions on preferences. In particular, the von Neumann-Morgenstern utility function must be separable, and state-dependent only for consumption of the insured good.     

Inequality aversion and separability in social risk evaluation

This paper examines how to satisfy “independence of the utilities of the dead” (Blackorby et al. in Econometrica 63:1303–1320, 1995; Bommier and Zuber in Soc Choice Welf 31:415–434, 2008) in the class of “expected equally distributed equivalent” social orderings (Fleurbaey in J Polit Econ 118:649–680, 2010) and inquires into the possibility to keep some aversion to inequality in this context. It is shown that the social welfare function must either be utilitarian or take a special multiplicative form. The multiplicative form is compatible with any degree of inequality aversion, but only under some constraints on the range of individual utilities.     

Labor migration and risk aversion in less developed countries

"In this paper we question the pioneering work of Todaro, which states that rural-to-urban labor migration in less developed countries (LDCs) is an individual response to a higher urban expected income. We demonstrate that rural-to-urban labor migration is perfectly rational even if urban expected income is lower than rural income. We achieve this under a set of fairly stringent conditions: an individual decision-making entity, a one-period planning horizon, and global risk aversion. We obtain the result that a small chance of reaping a high reward is sufficient to trigger rural-to-urban labor migration."     

Marginal risk aversion and preferences in a betting market

An individual's behavioural attitudes toward variance and non-symmetry in the payoff distributions of pari-mutuel gambles are empirically examined using the von Neumann - Morgenstern expected utility of wealth paradigm. Preferences over payoff distributions for a representative bettor are estimated from observed payoffs at a greyhound racetrack. The results indicate that the representative bettor exhibits increasing absolute risk aversion and, given that the representative bettor is locally non-satiated with regard to wealth, exhibits preference for variance and aversion to positive skewness in the payoff distributions of the gambles examined.     

Holdout behaviour: a question of diversification,risk aversion and expectation

We argue a holdout is not a destructive investor behaviour but an investment decision. The decision is characterized by the mean-variance approach. We investigate intercreditor conflict by diverse portfolio structure. We demonstrate that at some point during the Greek (2012) and Argentine (2005) debt restructuring programmes, it was reasonable for the investor to hold out. This model shows that the investment decision is based on the portfolio structure, risk aversion and expected possible payment of the debtor, so there is no free-rider behaviour. This is based on the fact that the investor harms herself due to destructive and uncooperative behaviour.     

Endogenous factor market distortion, risk aversion, and international trade under input uncertainty

In the context of non-diversifiable and sector-specific risks in labour markets, we show that the resulting factor market distortion – attributable to an endogenous intersectoral wage differential – can provide a possible rationale that explains why larger wage dispersion prevails in developing nations. We also demonstrate how endogenous wage distortions spill over to capital markets, with capital-poor economies offering lower rates of returns. In addition, we show that inequality in the distribution of wealth further deviates factor allocation away from first-best and impairs intersectoral mobility of the poor.
Ce mémoire montre que la distorsion dans le marché des facteurs qui résulte de risques non diversifiables et spécifiques à certains secteurs (et qui se traduit par un différentiel de salaire endogène entre secteurs) peut expliquer pourquoi on observe une dispersion plus grande des salaires dans les pays en voie de développement.On montre aussi comment des distorsions endogènes de salaires débordent vers les marchés de capitaux,ce qui fait que les pays pauvres en capital ont des rendements plus faibles.De plus, on montre que l'inégalité dans la distribution de la richesse contribue à faire dévier l'allocation des ressources de son optimum de premier ordre et nuit à la mobilité inter-sectorielle des pauvres.     

State-price densities under heterogeneous beliefs, the smile effect, and implied risk aversion

It has been widely noted in the empirical literature that state-price densities implicit in financial asset prices are not log-normal. This paper shows that this phenomenon can be caused by heterogeneity in investors’ beliefs. It derives the state-price density under heterogeneous beliefs in closed form and demonstrates that heterogeneous beliefs can give rise to multimodal state-price densities. Consequences for the “smile effect” in implied option volatility and for measures of risk aversion inferred from empirical state-price densities are discussed.     

The role of corruption and risk aversion in entrepreneurial intentions

The literature on entrepreneurship has suggested that an individual’s entrepreneurial intention depends on three types of factor: personal characteristics, the individual’s expertise and professional background, and external factors. Our study investigates how corruption, an external factor, and risk aversion, a personal characteristic, may simultaneously affect individuals’ entrepreneurial intentions. With data on 76 203 individuals in 53 countries, our estimation results indicate that risk aversion decreases the individual’s probability of having an entrepreneurial intention by 6.67 percentage points. In addition, an increase in 1 SD in the perceived level of corruption in a country decreases the individual’s probability of having an entrepreneurial intention by 0.96 percentage points.     

Increases in risk aversion and the distribution of portfolio payoffs

Oliver Hart proved the impossibility of deriving general comparative static properties in portfolio weights. Instead, we derive new comparative statics for the distribution of payoffs: A is less risk averse than B iff A?s payoff is always distributed as B?s payoff plus a non-negative random variable plus conditional-mean-zero noise. If either agent has nonincreasing absolute risk aversion, the non-negative part can be chosen to be constant. The main result also holds in some incomplete markets with two assets or two-fund separation, and in multiple periods for a mixture of payoff distributions over time (but not at every point in time).     

Economies of scale and mechanization in Chinese corn and wheat production

ABSTRACT

As the growth in Chinese farm productivity slowed down between 2000 and 2010, modernizing agriculture has become a priority of the Chinese government. Given the important role of mechanization and land reform policies in that context, this study investigates farm production in China with a specific emphasis on the potential role of mechanization as well as land and farm consolidation. A production function is estimated using farm household data on corn and wheat production in the Shandong and Hebei provinces. The results allowed us to explore the potential economies of scale across a range of farm size, the impact of land fragmentation, and assess the impact of machinery usage. Our findings suggest that, taken in isolation, the prospect for efficiency gains from mechanization and land reforms appears limited.     

Preference intensities and risk aversion in school choice: a laboratory experiment

We experimentally investigate in the laboratory prominent mechanisms that are employed in school choice programs to assign students to public schools and study how individual behavior is influenced by preference intensities and risk aversion. Our main results show that (a) the Gale–Shapley mechanism is more robust to changes in cardinal preferences than the Boston mechanism independently of whether individuals can submit a complete or only a restricted ranking of the schools and (b) subjects with a higher degree of risk aversion are more likely to play “safer” strategies under the Gale–Shapley but not under the Boston mechanism. Both results have important implications for enrollment planning and the possible protection risk averse agents seek.     

Efficiency and sharing of investment in specific human capital under risk aversion

This paper analyses the investment behavior of a risk-averse worker who searches for other jobs in a two-period model. It will be shown that given an appropriate investment technology, the worker will invest in specific human capital efficiently if his investment costs and return can be shared with some parties. The presence of sharing allows the worker to invest efficiently without being affected by his risk aversion since he can adjust his share of the investment in a way compatible with his attitude towards risk.