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Title: |
Risk-Neutrality versus Risk-Aversion in a Model of Production Efficiency
under Uncertainty |
| Author: |
Kohn, Robert E. |
| Author
Affiliation: |
Southern IL U |
| Source: |
International Economic Journal, Spring 1999, v. 13, no. 1, pp. 71-79 |
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Publication Date: |
Spring 1999 |
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Abstract: |
In an economy in which pollution from one
sector is multiplicatively and stochastically damaging to another
sector, there is efficiency when the expected ratio of the marginal rate
of substitution to the marginal rate of transformation equals unity.
When this ratio of variables is decomposed, the expected marginal rate
of substitution approximately equals the expected marginal rate of
transformation minus a correction based on covariance and a second
correction based on variance. Under one definition of risk-neutrality
both corrections vanish, whereas under another definition, it is only
the construction based on covariance that vanishes. |
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