scholarly journals Incentives, ability and disutility of effort

SERIEs ◽  
2021 ◽  
Author(s):  
Silvia Martinez-Gorricho ◽  
Miguel Sanchez Villalba
Keyword(s):  
Absolute Risk ◽  
Assortative Matching ◽  
Marginal Rate ◽  
Absolute Risk Aversion ◽  
Marginal Rate Of Substitution ◽  
New Novel ◽  
Effort Function ◽  
Parameter Values ◽  
Constant Absolute Risk Aversion ◽  
Rate Of Substitution

AbstractWe generalize the disutility of effort function in the linear-Constant Absolute Risk Aversion (CARA) pure moral hazard model. We assume that agents are heterogeneous in ability. Each agent’s ability is observable and treated as a parameter that indexes the disutility of effort associated with the task performed. In opposition to the literature (the “traditional” scenario), we find a new, “novel” scenario, in which a high-ability agent may be offered a weaker incentive contract than a low-ability one, but works harder. We characterize the conditions for the existence of these two scenarios: formally, the “traditional” (“novel”) scenario occurs if and only if the marginal rate of substitution of the marginal disutility of effort function is increasing (decreasing) in effort when evaluated at the second-best effort. If, further, this condition holds for all parameter values and matching is endogenous, less (more) talented agents work for principals with riskier projects in equilibrium. This implies that the indirect and total effects of risk on incentives are negative under monotone assortative matching.

Constant Absolute Risk Aversion, Bankruptcy, and Wealth-Dependent Decisions

1980 ◽  
Vol 53 (3) ◽  
pp. 285 ◽  
Author(s):  
Steven A. Lippman ◽  
John J. McCall ◽  
Wayne L. Winston
Keyword(s):  
Risk Aversion ◽  
Absolute Risk ◽  
Absolute Risk Aversion ◽  
Constant Absolute Risk Aversion

DE FINETTI ON RISK AVERSION

2009 ◽  
Vol 25 (2) ◽  
pp. 153-159
Author(s):  
Joseph B. Kadane ◽  
Gaia Bellone
Keyword(s):  
Risk Aversion ◽  
Absolute Risk ◽  
Risk Premia ◽  
Absolute Risk Aversion ◽  
Kenneth Arrow ◽  
De Finetti ◽  
Constant Absolute Risk Aversion ◽  
Special Case

According to Mark Rubinstein (2006) ‘In 1952, anticipating Kenneth Arrow and John Pratt by over a decade, he [de Finetti] formulated the notion of absolute risk aversion, used it in connection with risk premia for small bets, and discussed the special case of constant absolute risk aversion.’ The purpose of this note is to ascertain the extent to which this is true, and at the same time, to correct certain minor errors that appear in de Finetti's work.

scholarly journals Valuing the impact of Self-rated Health and Social Support on life satisfaction among Hong Kong Chinese population

2021 ◽  
Author(s):  
Chee Hon Chan
Keyword(s):  
Social Support ◽  
Life Satisfaction ◽  
Hong Kong ◽  
Chinese Population ◽  
Cost Benefit ◽  
Marginal Rate ◽  
Self Rated Health ◽  
Marginal Rate Of Substitution ◽  
Compensating Surplus ◽  
Rate Of Substitution

Abstract Background Research has highlighted that satisfaction in health and social support are key areas of life affecting individual’s wellbeing. Many social and public health initiatives use these two intervention mechanisms to improve individual’s wellbeing. For the purpose of cost-benefit assessment, there has been growing interest in expressing these intervention effects in economic terms. However, only a handful of studies have ever estimated these effects in economic terms, and none of which examined in a Chinese context. The aim of this study is to extend this line of valuation work to estimate the implicit willingness-to-pays on the effects of improving individuals’ self-rated health status (SRH) and social support (SS) on their life satisfaction in the Chinese population. Methods Using individual’s life satisfaction data from a two-wave representative panel survey in Hong Kong (n = 1,109), this study first conducted a cross-lagged analysis with structural equation modelling technique to examine the causal effects of SRH and SS on life satisfaction, while simultaneously adjusting their reverse causal influences. The use of this cross-lagged approach was the effort to minimising the endogeneity problem. Then, substituting the respective estimates to the formulae of compensating surplus, the marginal rate of substitution of SRH and SS with respect to individual’s equivalised monthly household were estimated and were then expressed as the willingness-to-pays on the effect of improving individuals’ SRH and SS on their life satisfaction. Results The cross-lagged analysis ascertained the casual effects of SRH (β = 0.078, 95%CI: 0.020, 0.151) and SS on individuals’ satisfaction with life. The sample’s marginal rate of substitution of SRH and SS were found to be 1.28 (95%CI: 0.43, 2.15) and 1.36 (95%CI: 0.23, 2.49) respectively. Translating into the concept of compensating surplus, the implicit monetary values of improving the sample’s SRH from “poor health” to “excellent health” and their SS from “little support” to “a lot of support” are equivalent to an increase in their equivalised monthly household income by HK$56,000 and HK$39,400 respectively. Conclusions This study has implications for the cost-benefit assessment in wellbeing initiatives for the Chinese population.

scholarly journals How Firms Can Hedge Against Market Risk

2014 ◽  
Vol 37 (1) ◽  
pp. 39-49
Author(s):  
Krzysztof Echaust
Keyword(s):  
Absolute Risk ◽  
Future Price ◽  
Utility Model ◽  
Forward Contracts ◽  
Hedging Strategy ◽  
Underlying Asset ◽  
Absolute Risk Aversion ◽  
Black Scholes ◽  
Expected Utility Model ◽  
Constant Absolute Risk Aversion

Abstract The article presents a problem of proper hedging strategy in expected utility model when forward contracts and options strategies are available. We consider a case of hedging when an investor formulates his own expectation on future price of underlying asset. In this paper we propose the way to measure effectiveness of hedging strategy, based on optimal forward hedge ratio. All results are derived assuming a constant absolute risk aversion utility function and a Black-Scholes framework.

scholarly journals A guide to extending and implementing generalized risk-adjusted cost-effectiveness (GRACE)

2021 ◽  
Author(s):  
Darius N. Lakdawalla ◽  
Charles E. Phelps
Keyword(s):  
Cost Effectiveness ◽  
Life Expectancy ◽  
Risk Preferences ◽  
Illness Severity ◽  
Health State ◽  
Marginal Rate ◽  
Permanent Disability ◽  
Adjusted Cost ◽  
Marginal Rate Of Substitution ◽  
Rate Of Substitution

AbstractThe generalized risk-adjusted cost-effectiveness (GRACE) model generalizes conventional cost-effectiveness analysis (CEA) by introducing diminishing returns to Health-Related Quality of Life (QoL). This changes CEA practice in three ways: (1) Willingness to pay (WTP) increases exponentially with untreated illness severity or pre-existing permanent disability, and WTP ends up lower for mild diseases but higher for severe diseases compared with conventional CEA; (2) Average treatment effectiveness should be adjusted for uncertainty in outcomes; and (3) The marginal rate of substitution between life expectancy and QoL varies with health state. Implementing GRACE requires new parameters describing risk preferences over QoL, the marginal rate of substitution between life expectancy (LE) and QoL, and the variance and skewness of treatment outcomes distributions. In this paper, we provide: (1) a generalized WTP threshold incorporating the possibility of permanent disability; (2) a simpler method to estimate the tradeoff rate between QoL and LE, eliminating the need to carry out treatment-by-treatment estimates; (3) a more-general method to adjust WTP for illness severity that permits non-constant relative risk-aversion in QoL; (4) a new approach to estimating risk-preferences over QoL, leveraging established empirical methods from “happiness” economics; and (5) a step-by-step guide for practitioners wishing to implement multi-period GRACE analyses.

scholarly journals Generalized marginal rate of substitution in multiconstraint consumer’s problems and their reciprocal expenditure problems

SERIEs ◽  
2011 ◽  
Vol 2 (3) ◽  
pp. 401-421 ◽  
Author(s):  
Manuel Besada ◽  
Javier García ◽  
Miguel Mirás ◽  
Carmen Vázquez
Keyword(s):  
Marginal Rate ◽  
Marginal Rate Of Substitution ◽  
Rate Of Substitution
Sign in / Sign up

Export Citation Format

Share Document