Risk aversion alone produces an interior solution without expropriation

Evidence

Thus, only if income is above a threshold θ we have the same utility as in the basic model. We assume that the status quo outcome is always above such threshold (i.e. θ < 1) linking more tidily risk aversion and reform. Moreover, for simplicity we take the probability of a bad reform to be zero, i.e. p = 1. Incidentally, this also shows that with risk aversion one obtains a well defined interior solution for M∗even without expropriation. — Philippe Aghion, Alberto Alesina, and Francesco Trebbi, Endogenous Political Institutions, 97

Categorization

• DEFINE: Sets out the modelling shortcut — a status-quo-above-threshold utility function — that makes risk aversion analytically tractable alongside reform.