Ambiguity aversion, higher-order risk attitude and optimal effort
AbstractIn this paper, we examine whether a more ambiguity-averse individual will invest in more effort to shift her initial starting wealth distribution toward a better target distribution. We assume that the individual has ambiguous beliefs regarding two target (starting) distributions and that one distribution is preferred to the other. We find that an increase in ambiguity aversion will decrease (increase) the optimal effort when the cost of effort is non-monetary. When the cost of effort is monetary, the effect depends on whether the individual would make more effort when the target (starting) distribution is the preferred distribution than the target (starting) distributions, the inferior one. We further characterize the individual’s higher-order risk preferences to examine the sufficient conditions.
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Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 50 (2012)
Issue (Month): 3 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505554
Effort; Prevention; Self-protection; Ambiguity;
Find related papers by JEL classification:
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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