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Disentangling Intertemporal Substitution and Risk Aversion Under the Expected Utility Theorem

  • C. Oscar Lau EMAIL logo
Published/Copyright: December 11, 2018

Abstract

This paper presents an axiomatic approach to separately control for the attitudes toward intertemporal substitution and risk aversion under the expected utility theorem. The standard time-separable form is recovered only if the functions dictating the two attitudes are identical. Risk aversion is defined on consumption amount rather than on utility (as in Kihlstrom and Mirman (1974 and 1981)). Moreover, the agent is allowed to trade his lottery outcome to optimize his consumption. As a result, this approach provides a straightforward extension of the familiar Arrow-Pratt results to multiple periods. These include categorizing, measuring, and comparing risk aversions.

JEL Classification: D81; D91; E21

Acknowledgements:

I thank Larry Epstein, Thomas Jeitschko, Jack Meyer, Leonard Mirman, Matthew Ryan, the editor-in-chief Burkhard Schipper, the anonymous reviewers, and seminar participants at Michigan State University, Midwest Economics Association Annual Meeting, Australasia Meeting of the Econometric Society, and Australasian Economic Theory Workshop for helpful comments. This paper is based on a chapter in my PhD dissertation. All errors and opinions are mine.

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Published Online: 2018-12-11

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