Comparative Statics under Uncertainty for a Class of Economic Agents
Abstract This paper explores trade-offs between assumptions on risk preferences, ordinal preferences under certainty, and cumulative distribution function (CDF) changes of an exogenous random variable needed for determinate comparative statics results. Specifically, we ask: Absent restrictions on risk preferences, what CDF changes lead all agents whose choice under certainty is monotonic in the exogenous variable to increase their choice variable under uncertainty? We find that the desired class of changes are those satisfying monotone likelihood ratio (MLR) dominance. We also note that MLR improvements are behaviorally identical to decreased risk aversion, a result that illuminates the relationship between changes in risk and risk aversion. Journal of Economic Literature , Classification Number: D81.