The LeChatelier principle for changes in risk (Q393273): Difference between revisions

Le Chatelier's principle states that in systems with positive feedbacks, the unrestricted response of an endogenous variable to a change in an exogenous variable is in the same direction and stronger in magnitude than the restricted response. The author demonstrates that this principle, introduced to economics by Samuelson, extends naturally to the comparative statics of changes in risk: in the presence of positive feedbacks between the decision variables, the unrestricted response to an increase in risk is in the same direction and stronger in magnitude than the restricted response (i.e. other decision variables fixed). The concepts of \(N\)th-degree risk complements and \(N\)th-degree risk substitutes are defined. In the case when two decision variables are either \(N\)th-degree risk complements or \(N\)th-degree risk substitutes, the unrestricted response of both variables to a risk change in the form of an \(N\)th-degree stochastically dominated shift is in the same direction and at least as strong in magnitude as the restricted response.