tailieunhanh - Ebook A course in monetary economics: Part 2

(BQ) The exposition is clear and logical, providing a solid foundation in monetary theory and the techniques of economic modeling. The book is rooted in the author's years of teaching and research, and will be highly suitable for monetary economics courses in both the upper-level undergraduate and graduate levels. | A Course in Monetary Economics Sequential Trade Money and Uncertainty Benjamin Eden Copyright 2005 by Benjamin Eden CHAPTER 12 Does Insurance Require Risk Aversion We argue here that insurance-type phenomena do not require risk aversion and can be explained by the efficiency gains associated with early resolution of uncertainty. Early resolution of uncertainty can be achieved by a combination of insurance and gambling and allows for a better allocation of consumption over time regardless of the attitude towards risk. The argument is based on Eden 1977 . We consider an economy with two agents. Consumption takes place at t 1 and at t 2. The state of nature s is defined by the amount of rain at t . The endowment of agent h at t 1 is Cl and his endowment at t 2 in state s is Ỡ2S- The aggregate endowment is non random and is given by Cl cj Cj and c2 C2S C2S for all s. Agents maximize a von Neumann Morgenstern strictly quasi-concave utility function Uh Ci C2 . The endowment may be described as a probability distribution of points in the Edgeworth box of figure . Since the points c C2S share the same first element they must lie on the same vertical axis. For example when there are only two states of nature s 1 with probability q and s 2 with probability 1 q the endowment may be described as point A with probability q and point B with probability 1 q . A feasible lottery random allocation can be described by a probability distribution of points in the Edgeworth box of figure . For example the allocation point A with probability Figure Assigning a positive probability to point A is not efficient 198 INTRODUCTION TO THE ECONOMICS OF UNCERTAINTY and point B with probability is feasible. The allocation point A with probability and point c with probability is not feasible because point c is not in the box . The state of nature the amount of rain at t is a natural random device. We think of it as a natural roulette wheel . Note that all .