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Which Shape for the Cost Curve of Risk?

Louis Eeckhoudt and Christian Gollier
The Journal of Risk and Insurance
Vol. 68, No. 3 (Sep., 2001), pp. 387-401
DOI: 10.2307/2678115
Stable URL: http://www.jstor.org/stable/2678115
Page Count: 15
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Which Shape for the Cost Curve of Risk?
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Abstract

It is often suggested that the larger the size of risk, the larger our willingness to pay (WTP) for a given reduction of this risk. The authors show that this is not true in general in the expected utility model. The authors examine under which conditions the WTP for a marginal reduction in the size of risk is increasing. The authors also examine the closely related question of whether the risk premium is superadditive in the size of risk. Different necessary and/or sufficient conditions are provided when the different units of risks borne by the agent are either perfectly correlated or independent.

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