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A Reconsideration of Arrow-Lind: Risk Aversion, Risk Sharing, and Agent Choice

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Listed:
  • Eric Fesselmeyer
  • Leonard J. Mirman
  • Marc Santugini

Abstract

We consider the original Arrow-Lind framework in which a government undertakes a risky project to be shared among many taxpayers. In our model, the taxpayers decide the level of participation in the risky project. Moreover, the amount of taxes collected by the government fully finances the public project. In this case, we show that projects cannot be evaluated only on the basis of expected benefits since the resulting tax determined by the model is incompatible with any risk sharing.

Suggested Citation

  • Eric Fesselmeyer & Leonard J. Mirman & Marc Santugini, 2012. "A Reconsideration of Arrow-Lind: Risk Aversion, Risk Sharing, and Agent Choice," Cahiers de recherche 1201, CIRPEE.
    • Handle: RePEc:lvl:lacicr:1201
    as

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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2012/CIRPEE12-01.pdf
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    References listed on IDEAS

    as
    1. Mirman, Leonard J. & Santugini, Marc, 2013. "Firms, shareholders, and financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 152-164.
    2. Kenneth J. Arrow & Robert C. Lind, 1974. "Uncertainty and the Evaluation of Public Investment Decisions," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 3, pages 54-75, Palgrave Macmillan.
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    More about this item

    Keywords

    Arrow-Lind Theorem; Risk aversion; Risk sharing; Choice;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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