Citation

Gollier C. J. Risk Uncertain. 2007; 35(2): 107-127.

Affiliation

EIF and IDEI, LERNA, Toulouse School of Economics, Toulouse, France

Copyright

(Copyright © 2007, Holtzbrinck Springer Nature Publishing Group)

DOI

10.1007/s11166-007-9021-x

PMID

unavailable

Abstract

We examine the collective risk attitude of a group with heterogeneous beliefs. We prove that the wealth-dependent probability distribution used by the representative agent is biased in favor of the beliefs of the more risk tolerant consumers. Moreover, increasing disagreement on the state probability raises the state probability of the representative agent. It implies that when most disagreements are concentrated in the tails of the distribution, the perceived collective risk is magnified. This can help to solve the equity premium puzzle. We show that the trade volume and the equity premium are positively correlated.

Language: en