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Precautionary self-insurance-cum-protection

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  • Wong, Kit Pong

Abstract

Precautionary self-insurance-cum-protection (SICP) arises when an individual spends more on SICP when background risk is introduced. We develop a two-period model wherein additive/multiplicative background risk prevails in the second period. Using the theory of monotone comparative statics and risk apportionment, we derive necessary and sufficient conditions under which the individual spends more on SICP when the background risk deteriorates via higher-order stochastic dominance. Prudence is called for to create a precautionary motive that induces the individual to shift his wealth in a way to reduce the loss of expected utility caused by the addition of background risk, thereby giving rise to the precautionary SICP.

Suggested Citation

  • Wong, Kit Pong, 2016. "Precautionary self-insurance-cum-protection," Economics Letters, Elsevier, vol. 145(C), pages 152-156.
    • Handle: RePEc:eee:ecolet:v:145:y:2016:i:c:p:152-156
    DOI: 10.1016/j.econlet.2016.06.006
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Heinzel Christoph & Richard Peter, 2021. "Precautionary motives with multiple instruments," Working Papers SMART 21-09, INRAE UMR SMART.
    2. Richard Peter, 2021. "Who should exert more effort? Risk aversion, downside risk aversion and optimal prevention," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1259-1281, June.
    3. Heinzel, Christoph & Peter, Richard, 2023. "Precaution with multiple instruments: The importance of substitution effects," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 392-412.
    4. Wong, Kit Pong, 2021. "Comparative risk aversion with two risks," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    5. Christoph Heinzel & Richard Peter, 2021. "Precautionary motives with multiple instruments [Motifs de précaution en cas de multiples instruments]," Working Papers hal-03484875, HAL.
    6. Heinzel, Christoph & Peter, Richard, 2021. "Precautionary motives with multiple instruments," Working Papers 316521, Institut National de la recherche Agronomique (INRA), Departement Sciences Sociales, Agriculture et Alimentation, Espace et Environnement (SAE2).
    7. Kit Pong Wong, 2019. "An interpretation of the condition for precautionary saving: the case of greater higher-order interest rate risk," Journal of Economics, Springer, vol. 126(3), pages 275-286, April.
    8. Wong, Kit Pong, 2017. "A note on risky targets and effort," Insurance: Mathematics and Economics, Elsevier, vol. 73(C), pages 27-30.

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    More about this item

    Keywords

    Background risk; Risk apportionment; Self-insurance; Self-protection;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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