Events at CERGE-EI

Prof. Antonio Cabrales

Universidad Carlos III de Madrid, Spain

Authors: Antonio Cabrales, Gregorio Curello, Olivier Gossner, and Roberto Serrano

Abstract: We study how willingness to pay for information depends on risk aversion when a decision maker faces background risk and can acquire information before choosing among financial assets. We distinguish investment menus, whose payoffs are procyclical with background wealth, from insurance menus, whose payoffs are anticyclical. Our main results show that the interaction between asset cyclicality and the tail geometry of background risk determines the direction of the comparative statics. Under log-concave background risk, willingness to pay for information decreases with risk aversion for investment menus, whereas under log-convex background risk it increases with risk aversion for insurance menus. The proofs compare the distributions of terminal wealth with and without information and develop new aggregation arguments for state- dependent single-crossing comparisons. We also show that these tail conditions are close to sharp by constructing converse examples in which reversing the tail geometry reverses the corresponding comparative statics.