Risk Aversion, Wealth, and Background Risk

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ID: 298123
2008
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Abstract
We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay for a risky security. We relate this measure to consumer's endowments and attributes and to measures of background risk and liquidity constraints. We find that risk aversion is a decreasing function of the endowment—thus rejecting CARA preferences. We estimate the elasticity of risk aversion to consumption at about 0.7, below the unitary value predicted by CRRA utility. We also find that households' attributes are of little help in predicting their degree of risk aversion, which is characterized by massive unexplained heterogeneity. We show that the consumer's environment affects risk aversion. Individuals who are more likely to face income uncertainty or to become liquidity constrained exhibit a higher degree of absolute risk aversion, consistent with recent theories of attitudes toward risk in the presence of uninsurable risks.
Reference Key
openalex_W3125424168 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Luigi Guiso, Monica Paiella
Journal journal of the european economic association
Year 2008
DOI
10.1162/jeea.2008.6.6.1109
URL
https://doi.org/10.1162/jeea.2008.6.6.1109
Keywords Keywords not found

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