Changes in Background Risk and Risk Taking Behavior

Eeckhoudt, Louis; Gollier, Christian; Schlesinger, Harris

doi:10.2307/2171866

Cited by 324 publications

(197 citation statements)

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“…5 See Kihlstrom, Romer and Williams (1981), Nachman (1982). 6 Note that for a CRRA agent her marginal utility covers the whole set of positive numbers. Therefore, given the usual integrability conditions, the optimal solution is interior (see Back and Dybvig (1993)).…”

Section: Conditions For Optimal Risk Takingmentioning

confidence: 99%

“…Kimball (1993) and Gollier and Pratt (1996) derive conditions under which derived risk aversion increases when an additive background risk is introduced, which in turn leads to less risk taking in the market. Eeckhoudt, Gollier and Schlesinger (1996) derive conditions under which an increase in background risk raises derived risk aversion. Their conditions are related to those of Ross (1981), who considered the case of a background risk that had a zero correlation with market risk, although it might not be statistically independent.…”

Section: Introductionmentioning

confidence: 99%

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Risk taking with additive and multiplicative background risks

Franke

Schlesinger

Stapleton

2011

Journal of Economic Theory

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Risk Taking with Additive and Multiplicative Background risks.We examine the effects of background risks on optimal portfolio choice. Examples of background risks include uncertain labor income, uncertainty about the terminal value of fixed assets such as housing and uncertainty about future tax liabilities. While some of these risks are additive and have been amply studied, others are multiplicative in nature and have received far less attention. The simultaneous effect of both additive and multiplicative risks has hitherto not received attention and can explain some paradoxical choice behavior. We rationalize such behavior and show how background risks might lead to seemingly U-shaped relative risk aversion for a representative investor.

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Section: Conditions For Optimal Risk Takingmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Risk taking with additive and multiplicative background risks

Franke

Schlesinger

Stapleton

2011

Journal of Economic Theory

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“…We therefore assume that utility is risk vulnerable in the stronger sense of Eeckhoudt et al (1996), so that aversion to bearing the foreground insurable risk increases with SSD deteriorations of the background risk. In the following propositions, we show that, in each of the three cases, introducing or increasing background risk reduces the welfare of both risk types.…”

Section: The Effect Of Background Risk On the Performance Of Insurancmentioning

confidence: 99%

Background Risk and the Performance of Insurance Markets under Adverse Selection

Crocker

Snow

2008

Geneva Risk Insur Rev

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Background risk can influence the performance of insurance markets that must deal with adverse selection when applicants are risk vulnerable, since they are more averse to bearing the insurable risk as a result of their exposures to background risk. We show that background risk always results in a lower deductible for the incentive constrained contract, and that a broader range of markets attains the stable sequential equilibrium cross-subsidized pair of separating contracts. We conclude that background risk always improves the performance of markets for coverage against (insurable) foreground risks that must deal with adverse selection. We also find, however, that these improvements are never sufficient to offset the cost to insureds of bearing the background risk.

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“…Theprobably more relevant -case of multiple risks has only recently found more attention in MV analysis. Inspired by studies on the effects of (additive) background risks on risktaking under the EU-hypothesis (see, e.g., Eeckhoudt et al, 1996;Caballé and Pomansky, 1997), Wong and Ma (2008) or Eichner and Wagener (2003b;2009) analyze quasi-linear decision problems where the MV-decision maker has faced both a direct, controllable risk and an exogenous background risk. Eichner and Wagener (2011) study linear portfolio choices with several risky assets.…”

Section: Introductionmentioning

confidence: 99%