On the (mis)use of wealth as a proxy for risk aversion

Marc F. Bellemare, Zachary S. Brown

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

Tests of risk sharing in the contracting literature often rely on wealth as a proxy for risk aversion. The intuition behind these tests is that since contract choice is monotonic in the coefficients of risk aversion, which are themselves assumed monotonic in wealth, the effect of a change in wealth on contract choice is clearly identified. We show that tests of risk sharing relying on wealth as a proxy for risk aversion are identified only insofar as the econometrician is willing to assume that (a) the principal is risk neutral or her preferences exhibit constant absolute risk aversion (CARA); and (b) the agent is risk neutral.

Original languageEnglish (US)
Pages (from-to)273-282
Number of pages10
JournalAmerican Journal of Agricultural Economics
Volume92
Issue number1
DOIs
StatePublished - Jan 2010

Keywords

  • contract theory
  • empirical tests
  • principal-agent models
  • risk aversion
  • risk sharing

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