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The Impact of Prudence on Optimal Prevention Revisited

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  • Jingyuan Li
  • Georges Dionne

Abstract

This paper re-examines the link between absolute prudence and self-protection activities. We show that the level of effort chosen by a prudent agent is larger than the optimal effort chosen by a risk-neutral agent if and only if the degree of absolute prudence is less than a threshold that is utility-independent. We explain this threshold by a trade-off between the variation of the variance and the level of the third moment of the loss distribution. We also discuss our result in terms of skewness. Our contribution extends the model of Eeckhoudt and Gollier (2005).

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File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2010/CIRPEE10-24.pdf
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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1024.

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Date of creation: 2010
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Handle: RePEc:lvl:lacicr:1024

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Related research

Keywords: Absolute prudence; Moments of the loss distribution; Self-protection; Variance; Skewness;

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Cited by:
  1. Dionne, Georges & Lebeau, Martin, 2010. "Le calcul de la valeur statistique d'une vie humaine
    [Estimation of statistical value of life]
    ," MPRA Paper 37573, University Library of Munich, Germany.
  2. Courbage, Christophe & Rey, Béatrice & Treich, Nicolas, 2013. "Prevention and precaution," TSE Working Papers 13-445, Toulouse School of Economics (TSE).
  3. Jindapon, Paan, 2013. "Do risk lovers invest in self-protection?," Economics Letters, Elsevier, vol. 121(2), pages 290-293.
  4. M. Menegatti & F. Rebessi, 2010. "On the substitution between saving and prevention," Economics Department Working Papers 2010-EP03, Department of Economics, Parma University (Italy).
  5. Gollier, Christian & Hammitt, James & Treich, Nicolas, 2013. "Risk and Choice: A Research Saga," IDEI Working Papers 804, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Xue, Minggao & Cheng, Wen, 2013. "Background risk, bivariate risk attitudes, and optimal prevention," Mathematical Social Sciences, Elsevier, vol. 66(3), pages 390-395.
  7. Kylymnyuk, Dmytro & Wagner, Alexander K., 2012. "Commitment through risk," Economics Letters, Elsevier, vol. 116(3), pages 295-297.
  8. Mario Menegatti, 2012. "New results on optimal prevention of risk averse agents," Economics Bulletin, AccessEcon, vol. 32(3), pages 2166-2173.
  9. Mario Menegatti, 2014. "Optimal choice on prevention and cure: a new economic analysis," The European Journal of Health Economics, Springer, vol. 15(4), pages 363-372, May.

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