Wh. Chiu, RISK-AVERSION WITH STATE-DEPENDENT PREFERENCES IN THE RANK-DEPENDENT EXPECTED UTILITY-THEORY, Geneva papers on risk and insurance. Theory, 21(2), 1996, pp. 159-177
We extend the analysis of risk aversion with state-dependent preferenc
es to the rank-dependent expected utility theory. We find that in this
extended theory for two preference relations to be comparable in risk
aversion not only do their reference sets need to coincide (a conditi
on first introduced by Karni [1983, 1985] in the original expected uti
lity framework), but they must also rank the prospective state-depende
nt outcomes in the same manner. We formalize this additional condition
by introducing the concept of certainty sets. Under our condition of
comparability, various results and characterizations of interpersonal
comparison of risk aversion are obtained. The implications for a speci
fic insurance problem are also discussed.