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Lau, C. Oscar

Disentangling intertemporal substitution and risk aversion under the expected utility theorem. (English) Zbl 1506.91057

B. E. J. Theor. Econ. 19, No. 2, Article ID 20160150, 14 p. (2018).
Summary: This paper presents an axiomatic approach to separately control for the attitudes toward intertemporal substitution and risk aversion under the expected utility theorem. The standard time-separable form is recovered only if the functions dictating the two attitudes are identical. Risk aversion is defined on consumption amount rather than on utility (as in [R. E. Kihlstrom and L. J. Mirman, “Risk aversion with many commodities”, J. Econ. Theory 8, No. 3, 361–388 (1974; doi:10.1016/0022-0531(74)90091-X); Rev. Econ. Stud. 48, 271–280 (1981; Zbl 0474.90013)]). Moreover, the agent is allowed to trade his lottery outcome to optimize his consumption. As a result, this approach provides a straightforward extension of the familiar Arrow-Pratt results to multiple periods. These include categorizing, measuring, and comparing risk aversions.

MSC:

91B16 Utility theory

Keywords:

intertemporal substitution; risk aversion; expected utility theorem

Citations:

Zbl 0474.90013
Cite Review PDF
Full Text: DOI

References:

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