TY  - JOUR
AU  - Obstfeld,Maurice
TI  - Evaluating Risky Consumption Paths:  The Role of Intertemporal Substitutability
JF  - National Bureau of Economic Research Technical Working Paper Series
VL  - No. 120
PY  - 1995
Y2  - January 1995
UR  - http://www.nber.org/papers/t0120
L1  - http://www.nber.org/papers/t0120.pdf
N1  - Author contact info:
Maurice Obstfeld
Department of Economics
University of California, Berkeley
530 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/643-9646
Fax: 510/642-6615
E-Mail: obstfeld@econ.berkeley.edu
AB  - In dynamic stochastic welfare comparisons, a failure clearly to distinguish between risk aversion and intertemporal substitutability can result in misleading assessments of the impact of risk aversion on the welfare costs of consumption-risk changes. The problem arises in any setting in which uncertainty is propagated over time, notably, but not exclusively, in economies with stochastic consumption trends. Regardless of the preference setup adopted, an increase in risk aversion amplifies the per-period costs of risks. The weights consumers use to cumulate the per-period costs of risks with persistent effects should, however, depend on intertemporal substitutability as well as on risk aversion. Under time-separable expected-utility preferences, an increase in the period utility function's curvature therefore alters the welfare effect of risk for reasons that in part are unrelated to risk aversion.
ER  -