Journal article
(No-)Betting Pareto Optima Under Rank-Dependent Utility
Mathematics of operations research, Vol.49(3), pp.1452-1471
08/01/2024
DOI: 10.1287/moor.2022.0317
Abstract
In a pure-exchange economy with no aggregate uncertainty, we characterize in closed form and full generality Pareto-optimal allocations between two agents who maximize (nonconcave) rank-dependent utilities (RDU). We then derive a necessary and sufficient condition for Pareto optima to be no-betting allocations (i.e., deterministic allocations or full insurance allocations). This condition depends only on the probability weighting functions of the two agents and not on their (concave) utility of wealth. Hence, with RDU preferences, it is the difference in probabilistic risk attitudes given common beliefs rather than heterogeneity or ambiguity in beliefs that is a driver of betting behavior. As by-product of our analysis, we answer the question of when sunspots matter in this economy.
Details
- Title: Subtitle
- (No-)Betting Pareto Optima Under Rank-Dependent Utility
- Creators
- Patrick Beissner - ACTTim Boonen - University of Hong KongMario Ghossoub - University of Waterloo
- Resource Type
- Journal article
- Publication Details
- Mathematics of operations research, Vol.49(3), pp.1452-1471
- DOI
- 10.1287/moor.2022.0317
- ISSN
- 0364-765X
- eISSN
- 1526-5471
- Publisher
- Informs
- Number of pages
- 21
- Grant note
- 2018-03961 / Natural Sciences and Engineering Research Council of Canada; Natural Sciences and Engineering Research Council of Canada (NSERC); CGIAR
- Language
- English
- Date published
- 08/01/2024
- Academic Unit
- Statistics and Actuarial Science
- Record Identifier
- 9985179681102771
Metrics
1 Record Views