Article ID: | iaor20002057 |
Country: | United States |
Volume: | 45 |
Issue: | 10 |
Start Page Number: | 1432 |
End Page Number: | 1439 |
Publication Date: | Oct 1999 |
Journal: | Management Science |
Authors: | Mitchell Douglas W., Gelles Gregory M. |
Keywords: | decision, finance & banking |
This paper considers decision-making in the presence of two additive risk sources, with no restrictions on the relation between the two risks. A utility function is said to exhibit broad DARA if and only if a rise in wealth always decreases the magnitude of the risk premium for one of the risks vis-à-vis the other. A condition on utility functions giving this property is derived: utility must be of the linear plus exponential form. It is shown that certain problems involving portfolios and risk-averse firms give unambiguous comparative statics if and only if utility exhibits broad DARA.