Increasing risk II: Its economic consequences

Abstract

This paper develops the risk comparative statics of utility derivatives with a focus on utility premia. I compare extensions of two kinds of normalized premia: the "rate of substitution between nth- and mth-degree risk increases" (Liu and Meyer, 2013) and the "normalized utility premium" (Li and Liu, 2014). Under additive risk, those premia provide separate, but equivalent characterizations. Multiplicative risk, on the other hand, provides for distinct characterizations for the two premia. The comparative reasoning is illustrated at interpersonal precautionary saving comparisons and the intrapersonal conditions for decreasing Ross absolute and relative risk aversion.