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Ambiguity aversion, higher-order risk attitude and optimal effort

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  • Huang, Rachel J.

Abstract

In 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 Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 50 (2012)
Issue (Month): 3 ()
Pages: 338-345

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Handle: RePEc:eee:insuma:v:50:y:2012:i:3:p:338-345

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Web page: http://www.elsevier.com/locate/inca/505554

Related research

Keywords: Effort; Prevention; Self-protection; Ambiguity;

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Cited by:
  1. Christian Robert & Pierre-Emmanuel Thérond, 2014. "Distortion risk measures, ambiguity aversion and optimal effort," Post-Print, HAL hal-00813199, HAL.
  2. repec:hal:wpaper:hal-00813199 is not listed on IDEAS
  3. Huang, Rachel J. & Huang, Yi-Chieh & Tzeng, Larry Y., 2013. "Insurance bargaining under ambiguity," Insurance: Mathematics and Economics, Elsevier, Elsevier, vol. 53(3), pages 812-820.

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