Linear fractional relative risk aversion

Kristian Behrens; Yasusada Murata

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arXiv · 2509.09865

Linear fractional relative risk aversion

Kristian Behrens·Yasusada Murata

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Abstract

We characterize the family of utility functions satisfying linear fractional relative risk aversion (LFRRA) in terms of the Gauss hypergeometric functions. We apply this family, which nests various utility functions used in different strands of literature, to monopolistic competition and obtain the profit-maximizing price by generalizing the Lambert W function. We let firm-level data decide whether the RRA in each sector or in the aggregate economy is increasing, decreasing, or constant, which in turn determines whether markups are decreasing, increasing, or constant with respect to marginal costs.

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Kristian Behrens, Yasusada Murata. 2025-09-11. Linear fractional relative risk aversion. https://arxiv.org/abs/2509.09865

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