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Collective Risk Control And Group Security: The Unexpected Consequences of Differential Risk Aversion

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  • Toshihiro Ihori

    (Faculty of Economics, University of Tokyo)

  • Martin C. McGuire

    (Department of Economics, University of California-Irvine)

Abstract

We provide an analysis of odds-improving self-protection for when it yields collective benefits to groups, such as alliances of nations, for whom risks of loss are public bads and prevention of loss is a public good. Our analysis of common risk reduction shows how diminishing returns in risk improvement can be folded into income effects. These income effects then imply that whether protection is inferior or normal depends on the risk aversion characteristics of underlying utility functions, and on the interaction between these, the level of risk, and marginal effectiveness of risk abatement. We demonstrate how public good inferiority is highly likely when the good is "group risk reduction." In fact, we discover a natural or endogenous limit on the size of a group and of the amount of risk controlling outlay it will provide under Nash behavior. We call this limit an "Inferior Goods Barrier" to voluntary risk reduction. For the paradigm case of declining risk aversion, increases in group size/wealth will cause provision of more safety to change from a normal to an inferior good thereby creating such a barrier.

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Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-402.

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Length: 43pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:tky:fseres:2006cf402

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Citations

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Cited by:
  1. Yamamoto, Wataru, 2013. "Negative economic consequences of ethical campaigns?: Market data evidence," MPRA Paper 49070, University Library of Munich, Germany.
  2. Toshihiro Ihori & Martin McGuire, 2006. "Group Provision Against Adversity: Security By Insurance vs. Protection," CARF F-Series CARF-F-086, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  3. Toshihiro Ihori & Martin McGuireb, 2008. "National Adversity: Managing Insurance and Protection," CIRJE F-Series CIRJE-F-554, CIRJE, Faculty of Economics, University of Tokyo.
  4. Lohse, Tim & Julio R. Robledo & Ulrich Schmidt, 2006. "Self-Insurance and Self-Protection as Public Goods," Hannover Economic Papers (HEP) dp-354, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  5. Heike Auerswald & Kai A. Konrad & Marcel Thum, 2011. "Adaptation, Mitigation and Risk-Taking in Climate Policy," CESifo Working Paper Series 3320, CESifo Group Munich.
  6. Martin C. McGuire, 2010. "Economic Analysis and International Security," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 6(2), pages 313-346, March.
  7. David Rietzke & Brian Roberson, 2013. "The robustness of ‘enemy-of-my-enemy-is-my-friend’ alliances," Social Choice and Welfare, Springer, vol. 40(4), pages 937-956, April.
  8. Lohse, Tim & Robledo, Julio R., 2012. "Public self-insurance and the Samaritan's dilemma in a federation," Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" SP II 2012-103, Social Science Research Center Berlin (WZB).
  9. Toshihiro Ihori & Martin McGuire, 2006. "Patterns of Non-exponential Growth of Macroeconomic Models: Two-parameter Poisson-Dirichlet Models," CIRJE F-Series CIRJE-F-450, CIRJE, Faculty of Economics, University of Tokyo.

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