Preprints of the Max Planck Institute for Research on Collective Goods 2004/6
The paper discusses criteria for comparing risk aversion of decision makers when outcomes are multidimensional. A weak concept, commodity specific greater risk aversion, is based on the comparison of risk premia paid in a specified commodity. A stronger concept, uniformly greater risk aversion is based on the comparison of risk premia regardless of what commodities are used for payment. Neither concept presumes that von Neumann-Morgenstern utility functions are ordinally equivalent. Nonincreasing consumption specific risk aversion is shown to be sufficient to make randomization undesirable in an agency problem with hidden characteristics.
Multidimensional Risks Risk Aversion Risk Premia Randomization in Incentive Schemes