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Idiosyncratic risk, sharing rules and the theory of risk bearing

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It has been recognised that the choice of an agent between risky and riskless assets is complicated by the existence of other unavoidable riks... For instance, the purchase of assets by an individual may be made in the context of uncertain wage income. In this paper, we are concerned with the response of the agent to the existence of additional non-insurable income risk... Since our emphasis is on the sensitivity of the optimal allocation decision, we use the concepts of absolute prudence and the precautionary premium proposed by Kimbal (1990), which characterize the behavior of the marginal utility function... The results are made more specific by considering the special case of the Hyperbolic Absolute Risk Aversion (HARA) family of utility functions. In this case, the precautionary premium can be defined more precisely and the sharing rules can be derived explicitely

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/Inseadwp1993/93-02.pdf

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Copyright INSEAD. All rights reserved