Risk aversion with nothing to lose

• 成果类型: Article
• 署名作者: Pegoraro, Stefano
• 署名单位: University of Notre Dame
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2024.105902
• 发表日期: 2024
• 关键词: Risk aversion; Endogenous risk attitudes; dynamic programming; distress; Risk shifting

摘要

In a continuous-time model, a risk-neutral decision-maker chooses the volatility of a state variable and is terminated when the variable falls below a threshold. I provide economically interpretable conditions under which the decision-maker becomes risk averse endogenously and minimizes volatility near termination, even if she faces myopic incentives to gamble for resurrection. The conditions introduce forward-looking incentives to preserve economic rents. I show these conditions are met in a wide range of apparently unrelated models, thus identifying forward- looking rents as a unifying economic mechanism behind endogenous risk aversion. I also provide conditions for the decision-maker to become risk loving endogenously.