OUTSIDE RISK-AVERSION AND THE COMPARATIVE STATICS OF INCREASING RISK IN QUASI-LINEAR DECISION-MODELS

Necessary and sufficient conditions are derived to determine the effec t of increases in Rothschild-Stiglitz risk on optimal decisions in a c lass of competitive models with price uncertainty. Outside risk aversi on and composite outside risk aversion are defined. The effect of incr eased risk on the optimal decision is controlled by composite outside risk aversion. It is decomposed into a wealth effect, controlled by do wnside risk aversion and an uncertainty effect controlled by outside r isk aversion. Composite outside risk aversion is shown to be equivalen t to outside risk aversion, so that the uncertainty effect controls th e overall effect.