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Calibrating the wealth effects of decoupled payments: Does decreasing absolute risk aversion matter?

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  • Just, David R.

Abstract

Arrow's hypotheses regarding the relationship between wealth and risk aversion measures have formed the basis for a large body of empirical research and theory. For example, many have suggested that decoupled farm subsidy payments may increase production as they decrease farmers' risk aversion. This paper develops a new calibration technique designed to measure the minimum change in concavity of a utility of wealth function necessary to describe a particular change in production behavior for some discrete change in wealth. I conclude that measurable changes in production levels should not be produced by changing levels of risk aversion except when wealth changes are a substantial portion of wealth. This tool draws into question the usefulness of Arrow's hypotheses in many current applications.

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  • Just, David R., 2011. "Calibrating the wealth effects of decoupled payments: Does decreasing absolute risk aversion matter?," Journal of Econometrics, Elsevier, vol. 162(1), pages 25-34, May.
    • Handle: RePEc:eee:econom:v:162:y:2011:i:1:p:25-34
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