Substituting one risk increase for another: Extension and application

Jianli WANG; Hongxia WANG; Jingyuan LI

doi:10.1016/j.econlet.2025.112185

Substituting one risk increase for another: Extension and application

Jianli WANG, Hongxia WANG^*, Jingyuan LI

^*Corresponding author for this work

Department of Operations and Risk Management

Research output: Journal Publications › Journal Article (refereed) › peer-review

Abstract

The paper theoretically extends the idea of the rate of substitution of one risk change for another. We provide a generalized definition of the rate of substitution between two risk changes beginning with different starting risks. It is demonstrated that our generalized version can be used to compare two agents’ attitudes towards risk according to the Ross risk averse order. Moreover, we find that it provides additional insight into the probability premium approach to comparative risk aversion.

Original language	English
Article number	112185
Journal	Economics Letters
Volume	247
Early online date	20 Jan 2025
DOIs	https://doi.org/10.1016/j.econlet.2025.112185
Publication status	Published - Feb 2025

Bibliographical note

The authors would like to thank the editor and two anonymous referees for providing valuable suggestions which have led to significant improvement of this article.

Publisher Copyright:
© 2025

Funding

This work is supported by the National Natural Science Foundation of China with Grant Numbers 72071109, 71901123, 72141304, the Philosophy and Social Science Grant of Jiangsu Province, China under Research Project No. 2020SJZDA070 and General Research Fund of Hong Kong Research Grants Council under Research Project No. LU 13500322, Lingnan university Faculty Research Grant under Project No. DB24B8.

Keywords

Rate of substitution
Ross risk aversion
Risk increases
Risk apportionment

Access to Document

10.1016/j.econlet.2025.112185

https://linkinghub.elsevier.com/retrieve/pii/S0165176525000229

Cite this

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title = "Substituting one risk increase for another: Extension and application",

abstract = "The paper theoretically extends the idea of the rate of substitution of one risk change for another. We provide a generalized definition of the rate of substitution between two risk changes beginning with different starting risks. It is demonstrated that our generalized version can be used to compare two agents{\textquoteright} attitudes towards risk according to the Ross risk averse order. Moreover, we find that it provides additional insight into the probability premium approach to comparative risk aversion.",

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AU - WANG, Hongxia

AU - LI, Jingyuan

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N2 - The paper theoretically extends the idea of the rate of substitution of one risk change for another. We provide a generalized definition of the rate of substitution between two risk changes beginning with different starting risks. It is demonstrated that our generalized version can be used to compare two agents’ attitudes towards risk according to the Ross risk averse order. Moreover, we find that it provides additional insight into the probability premium approach to comparative risk aversion.

AB - The paper theoretically extends the idea of the rate of substitution of one risk change for another. We provide a generalized definition of the rate of substitution between two risk changes beginning with different starting risks. It is demonstrated that our generalized version can be used to compare two agents’ attitudes towards risk according to the Ross risk averse order. Moreover, we find that it provides additional insight into the probability premium approach to comparative risk aversion.

KW - Rate of substitution

KW - Ross risk aversion

KW - Risk increases

KW - Risk apportionment

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U2 - 10.1016/j.econlet.2025.112185

DO - 10.1016/j.econlet.2025.112185

M3 - Journal Article (refereed)

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Substituting one risk increase for another: Extension and application

Abstract

Bibliographical note

Funding

Keywords

Access to Document

Other files and links

Cross-prudence and Optimal Prevention

Uncertainty aversion in the presence of a background risk (在面臨背景風險之下的不確定規避)

Cite this

Substituting one risk increase for another: Extension and application

Abstract

Bibliographical note

Funding

Keywords

Access to Document

Other files and links

Projects

Cross-prudence and Optimal Prevention

Uncertainty aversion in the presence of a background risk (在面臨背景風險之下的不確定規避)

Cite this