Comparative Mixed Risk Aversion: Definition and Application to Self-Protection and Willingness to Pay

Journal of Risk and Uncertainty 29, 3, 261-276, 2004

17 Pages Posted: 16 Apr 2003 Last revised: 11 Jan 2023

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Kais Dachraoui

Statistics Canada

Louis Eeckhoudt

Facultes Universitaires Catholiques de Mons (FUCAM)

Philippe Godfroid

Facultes Universitaires Catholiques de Mons (FUCAM)

Date Written: January 1, 2003

Abstract

Mixed risk aversion (Caballe and Pomansky, 1996) defines the class of increasing utility functions that have derivatives alternating in sign, with positive odd derivatives and negative even derivatives. In this article, we characterize comparative mixed risk aversion so as to answer the following question: how different risk attitudes affect choices when expenditures change event probabilities? Attempts to answer this question in the literature found an endogenous probability. We show that the threshold probability is 1/2 under mixed risk aversion. We consider applications to self-protection and willingness to pay. We obtain that if agent v is more mixed risk averse than agent u, then v will select a higher level of self-protection and will have a higher willingness to pay than u only if the accident probability is lower than 1/2. We extend the results to the presence of a background risk.

Keywords: Mixed risk aversion, comparative mixed risk aversion, self-protection, willingness to pay, background risk

JEL Classification: D80

Suggested Citation

Dionne, Georges and Dachraoui, Kais and Eeckhoudt, Louis and Godfroid, Philippe, Comparative Mixed Risk Aversion: Definition and Application to Self-Protection and Willingness to Pay (January 1, 2003). Journal of Risk and Uncertainty 29, 3, 261-276, 2004, Available at SSRN: https://ssrn.com/abstract=373501 or http://dx.doi.org/10.2139/ssrn.373501

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Kais Dachraoui

Statistics Canada ( email )

Ottawa, Ontario
Canada

Louis Eeckhoudt

Facultes Universitaires Catholiques de Mons (FUCAM) ( email )

Chaussee de Binche, 151
Mons 7000
Belgium

Philippe Godfroid

Facultes Universitaires Catholiques de Mons (FUCAM) ( email )

Chaussee de Binche, 151
Mons B7000
Belgium

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