1ST-DEGREE AND 2ND-DEGREE TRANSFORMATIONS AND COMPARATIVE STATICS UNDER UNCERTAINTY

The purpose of this paper is to investigate the direction of change in the optimal value of the choice variable following a deterministic transformation of the underlying random variable. Here we consider transformations representing either first or second degree stochastically dominant shifts. Several theorems are presented giving conditions on the economic model and risk taking characteristics of the decision maker that are sufficient to obtain unambiguous comparative statics results for arbitrary FSD and SSD transformations as well as for simple FSD and SSD transformations.