1989 | OriginalPaper | Buchkapitel
Utility Functions, Interest Rates, and the Demand for Bonds
verfasst von : John W. Pratt
Erschienen in: Studies in the Economics of Uncertainty
Verlag: Springer New York
Enthalten in: Professional Book Archive
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One riskless investment dominates any other with a lower interest rate in the simplest, most complete way one could hope for. Still, given the risky assets available, a lower riskless interest rate might lead a risk-averse expected-utility maximizer to (a) allocate more of his investment funds to riskless assets, or (b) allocate enough more to obtain greater riskless return including principal, or even (c) allocate enough more to obtain greater riskless income. One easy intuitive explanation is that, at a lower riskless interest rate, greater riskless investment may be needed to guarantee some minimum acceptable income or future wealth. Alternative characterizations of the three possibilities are that, for this individual, (a) demand for riskless future wealth has elasticity less than 1; (b) riskless future wealth is a Giffen good; (c) riskless income is a Giffen good.