Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules

28 Pages Posted: 19 May 2006

See all articles by Chiaki Hara

Chiaki Hara

Kyoto University - Institute of Economic Research

James Huang

Lancaster University - Department of Accounting and Finance

Christoph Kuzmics

University of Graz - Department of Economics

Date Written: May 18, 2006

Abstract

We study the representative consumer's risk attitude and efficient risk-sharing rules in a single-period, single-good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes. We prove that if all consumers have convex absolute risk tolerance, so must the representative consumer. We also identify a relationship between the curvature of an individual consumer's individual risk sharing rule and his absolute cautiousness, the first derivative of absolute risk-tolerance. Furthermore, we discuss some consequences of these results and refinements of these results for the class of HARA utility functions.

Keywords: aggregation, heterogeneous consumers, absolute risk tolerance, mutual fund theorem

JEL Classification: D51, D58, D81, G11, G12, G13

Suggested Citation

Hara, Chiaki and Huang, James Xiaoping and Kuzmics, Christoph, Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules (May 18, 2006). Available at SSRN: https://ssrn.com/abstract=903164 or http://dx.doi.org/10.2139/ssrn.903164

Chiaki Hara

Kyoto University - Institute of Economic Research ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
Japan

James Xiaoping Huang

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
01 5245 93633 (Phone)
01 5248 47321 (Fax)

Christoph Kuzmics (Contact Author)

University of Graz - Department of Economics ( email )

Universitaetsstrasse 15
RESOWI - F4
Graz, 8010
Austria

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