Collective Risk Control And Group Security: The Unexpected Consequences of Differential Risk Aversion
AbstractWe 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-402.
Date of creation: Mar 2006
Date of revision:
Contact details of provider:
Postal: Hongo 7-3-1, Bunkyo-ku, Tokyo 113-0033
Web page: http://www.cirje.e.u-tokyo.ac.jp/index.html
More information through EDIRC
Other versions of this item:
- TOSHIHIRO IHORI & MARTIN C. McGUIRE, 2007. "Collective Risk Control and Group Security: The Unexpected Consequences of Differential Risk Aversion," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(2), pages 231-263, 04.
- Toshihiro Ihori & Martin C. McGuire, 2006. "Collective Risk Control And Group Security: The Unexpected Consequences of Differential Risk Aversion," CARF F-Series CARF-F-060, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Richard Cornes & Roger Hartley, 2003.
"Aggregative Public Goods Games,"
NajEcon Working Paper Reviews
- Vicary, Simon & Sandler, Todd, 2002. "Weakest-link public goods: Giving in-kind or transferring money," European Economic Review, Elsevier, vol. 46(8), pages 1501-1520, September.
- Mueller,Dennis C., 2003. "Public Choice III," Cambridge Books, Cambridge University Press, number 9780521894753, December.
- Andreoni, James, 1988. "Privately provided public goods in a large economy: The limits of altruism," Journal of Public Economics, Elsevier, vol. 35(1), pages 57-73, February.
- Sandler, Todd & Lapan, Harvey E., 1988. "The Calculus of Dissent: An Analysis of Terrorists' Choice of Targets," Staff General Research Papers 10818, Iowa State University, Department of Economics.
- Ihori, Toshihiro, 1996. "International public goods and contribution productivity differentials," Journal of Public Economics, Elsevier, vol. 61(1), pages 139-154, July.
- Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-48, July-Aug..
- Garance Genicot & Debraj Ray, 2003.
"Group Formation in Risk--Sharing Arrangements,"
Review of Economic Studies,
Wiley Blackwell, vol. 70(1), pages 87-113, January.
- J. Hirshleifer, 1985. "From weakest-link to best-shot: Correction," Public Choice, Springer, vol. 46(2), pages 221-223, January.
- McGuire, Martin C & Pratt, John & Zeckhauser, Richard, 1991. " Paying to Improve Your Chances: Gambling or Insurance?," Journal of Risk and Uncertainty, Springer, vol. 4(4), pages 329-38, December.
- Vicary, Simon, 1990. "Transfers and the weakest-link : An extension of Hirshleifer's analysis," Journal of Public Economics, Elsevier, vol. 43(3), pages 375-394, December.
- Bergstrom, Theodore & Blume, Lawrence & Varian, Hal, 1986. "On the private provision of public goods," Journal of Public Economics, Elsevier, vol. 29(1), pages 25-49, February.
- McGuire, Martin C & Shrestha, Ratna K, 2003. "A New Approach to Group Structure, Burden Sharing, and the Equilibrium Provision of Public Goods," International Tax and Public Finance, Springer, vol. 10(4), pages 341-56, August.
- Cornes, Richard, 1993. "Dyke Maintenance and Other Stories: Some Neglected Types of Public Goods," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 259-71, February.
- Becker, Gary S, 1974.
"A Theory of Social Interactions,"
Journal of Political Economy,
University of Chicago Press, vol. 82(6), pages 1063-93, Nov.-Dec..
- Warr, Peter G., 1983. "The private provision of a public good is independent of the distribution of income," Economics Letters, Elsevier, vol. 13(2-3), pages 207-211.
- Cornes, Richard & Sandler, Todd, 1984. "Easy Riders, Joint Production, and Public Goods," Economic Journal, Royal Economic Society, vol. 94(375), pages 580-98, September.
- Tim Lohse & Julio R. Robledo, 2012.
"Public Self-Insurance and the Samaritan‘s Dilemma in a Federation,"
Ruhr Economic Papers
0330, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
- 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).
- Yamamoto, Wataru, 2013. "Negative economic consequences of ethical campaigns?: Market data evidence," MPRA Paper 49070, University Library of Munich, Germany.
- Ulrich Schmidt, 2010.
"Self-Insurance and Self-Protection as Public Goods,"
Kiel Working Papers
1613, Kiel Institute for the World Economy.
- Tim Lohse & Julio R. Robledo & Ulrich Schmidt, 2012. "Self‐Insurance and Self‐Protection as Public Goods," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(1), pages 57-76, 03.
- Lohse, Tim & Julio R. Robledo & Ulrich Schmidt, 2006. "Self-Insurance and Self-Protection as Public Goods," Diskussionspapiere der Wirtschaftswissenschaftlichen FakultÃ¤t der Leibniz UniversitÃ¤t Hannover dp-354, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
- Schmidt, Ulrich & Robledo, Julio R. & Lohse, Tim, 2007. "Self-Insurance and Self-Protection as Public Goods," Economics Working Papers 2007,16, Christian-Albrechts-University of Kiel, Department of Economics.
- Heike Auerswald & Kai A. Konrad & Marcel Thum, 2011. "Adaptation, Mitigation and Risk-Taking in Climate Policy," CESifo Working Paper Series 3320, CESifo Group Munich.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CIRJE administrative office).
If references are entirely missing, you can add them using this form.