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Comparative risk apportionment

Abstract

A decision maker who would rather apportion an independent risk in a state with a good lottery than in a state with a bad lottery is said to have a preference for risk apportionment (Eeckhoudt and Schlesinger in Am Econ Rev 96:280–289, 2006). In this paper, we propose a measure for the strength of nth-degree risk apportionment preference based on Pratt’s probability premium (Pratt in Econometrica 32:122–136, 1964). Under expected utility theory, we analyze the relationship between a greater preference for risk apportionment and both the Ross and Arrow–Pratt versions of comparative risk aversion.

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Acknowledgements

We thank Christophe Courbage, David Crainich, Sebastian Ebert, Christoph Heinzel, Jack Meyer, Wendy Nardi, Richard Peter, and seminar participants at EGRIE 2019, University of Alabama, University of Colorado, University of Queensland, University of Tennessee, and Virginia Tech for insightful discussions and comments.

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Correspondence to Paan Jindapon.

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Jindapon, P., Liu, L. & Neilson, W.S. Comparative risk apportionment. Econ Theory Bull 9, 91–112 (2021). https://doi.org/10.1007/s40505-021-00200-4

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  • DOI: https://doi.org/10.1007/s40505-021-00200-4

Keywords

  • Risk apportionment
  • Risk aversion
  • Downside risk aversion
  • Prudence

JEL Classification

  • D81