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Production decisions based on absolute vs. relative risk aversion and their extensions
Linköping University, Department of Management and Engineering, Production Economics. Linköping University, Faculty of Science & Engineering.
2021 (English)In: International Journal of Production Economics, ISSN 0925-5273, E-ISSN 1873-7579, Vol. 234, article id 108036Article in journal (Refereed) Published
Abstract [en]

In this paper we compare the two basic risk preference measures suggested independently by John W. Pratt (1964) and Kenneth J. Arrow (1965) as to their impact on simple production decisions with uncertain economic outcomes. We develop a further related concept by introducing a risk aversion leverage measuring the dependence of absolute risk aversion on wealth. We also discover a remarkable approximate relation between risk aversion measures of different leverages making the corresponding risk preference functions similar and leading to a method for estimating different Certainty Monetary Equivalents using zero-leverage expressions. We concentrate on three simple cases of production decisions of the Newsboy type.

Place, publisher, year, edition, pages
ELSEVIER , 2021. Vol. 234, article id 108036
Keywords [en]
Risk aversion; Risk aversion leverage; Newsboy problem; Certainty monetary equivalent; Net present value; Internal risk aversion; Arrow-Pratt; CME; NPV; IRA
National Category
Economics
Identifiers
URN: urn:nbn:se:liu:diva-175069DOI: 10.1016/j.ijpe.2021.108036ISI: 000633039400004OAI: oai:DiVA.org:liu-175069DiVA, id: diva2:1545381
Available from: 2021-04-19 Created: 2021-04-19 Last updated: 2021-04-19Bibliographically approved

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Grubbström, Robert W.

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