Consumption Commitments and Risk Preferences
- Topics:
- Insurance
- Tags:
- Aversion,
- Business Operations,
- Commitment,
- Corporate Insurance,
- Finance,
- Financial Planning,
- Insurance
- Source:
- University of California
FREE Registration is required
Vendor Registration: $ Paid Download
Overview: Many households devote a large fraction of their budgets to "Consumption commitments" - goods that involve transaction costs and are infrequently adjusted. This paper characterizes risk preferences in an expected utility model with commitments. The paper shows that commitments affect risk preferences in two ways: they amplify risk aversion with respect to moderate-stake shocks and they create a motive to take large-payoff gambles. The model thus helps resolve two basic puzzles in expected utility theory: the discrepancy between moderate-stake and large-stake risk aversion and lottery playing by insurance buyers.
(Is this item miscategorized? Does it need more tags? Let us know.)
Format: PDF | Size: 569KB | Date: Aug 2006 | Pages: 53
