Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 8/2010: Income risk aversion with quantity constraints.

Fred Schroyen ()
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Fred Schroyen: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway

Abstract: In this paper, I consider a consumer with a concave utility function over n commodities and trace out the consequences of quantity constraints on product markets for the consumer’s aversion towards income risk. I show that the effect can be decomposed in a cardinal and ordinal term, that both terms may add up to a non-linear effct on the coefficient of relative risk aversion, and that a severely rationed consumer may even become less risk averse then when unconstrained.

Keywords: Household demand; income risk aversion; quantity constraints.

JEL-codes: D11; D81

13 pages, February 4, 2010

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