Data Management

Comparative Risk Aversion: A Formal Approach With Applications To Savings Behaviors

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Executive Summary

The authors consider a formal approach to comparative risk aversion and apply it to intertemporal choice models. This allows asking whether standard classes of utility functions, such as those inspired by Kihlstrom and Mirman (1974), Selden (1978), Epstein and Zin (1989) and Quiggin (1982) are well-ordered in terms of risk aversion. Moreover, opting for this model-free approach allows establishing new general results on the impact of risk aversion on savings behaviors. In particular, they show that risk aversion enhances precautionary savings, clarifying the link that exists between the notions of prudence and risk aversion.

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