| Abstract: | This paper analyzes a model of consumer behavior where transaction risk in the form of a divergence between bid and executed demand is incorporated into the consumer's decision process. A neutral assumption concerning risk preferences, combined with income and expenditure constraints, is shown to be sufficient to generate behavior commonly associated with risk aversion. Such responses to transaction risk are referred to as objective reactions as opposed to subjective attitudes toward risk. The income effect is shown to play an important role in determining behavioral reactions to this type of risk. |
