Multiplicative background risk

Arbeitspapier

We consider random wealth of the multiplicative form xy, where x and y are statistically independent random variables. We assume that x is endogenous to the economic agent, but that y is an exogenous and uninsurable background risk. Our main focus is on how the randomness of y affects risk-taking behavior for decisions on the choice of x. We characterize conditions on preferences that lead to more cautious behavior. We also develop the concept of the affiliated utility function, which we define as the composition of the underlying utility function and the exponential function. This allows us to adapt several results for additive background risk to the multiplicative case.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: WZB Discussion Paper ; No. FS IV 02-06

Classification and Topics

• Classification: Wirtschaft ; Criteria for Decision-Making under Risk and Uncertainty
• Subject: background risk ; standard risk aversion ; affiliated utility function

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Franke, Günter ; Schlesinger, Harris ; Stapleton, Richard C.
• Event: Veröffentlichung
• (who): Wissenschaftszentrum Berlin für Sozialforschung (WZB)
• (where): Berlin
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/52595
• Last update: 10.03.2025, 11:44 AM CET