Incremental Risk Vulnerability
Abstract
We present a necessary and sufficient condition on an agent’s utility function for a simple
mean preserving spread in an independent background risk to increase the agent’s risk aver-
sion (incremental risk vulnerability). Gollier and Pratt (1996) have shown that declining
and convex risk aversion as well as standard risk aversion are sufficient for risk vulnerability.
We show that these conditions are also sufficient for incremental risk vulnerability.
In addition, we present sufficient conditions for a restricted set of stochastic increases in an
independent background risk to increase risk aversion.
Journal of Economic Literature Classification Numbers:
D 52, D 81
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