Collective Risk Control and Group Security: The Unexpected Consequences of Differential Risk Aversion
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. Copyright 2007 Blackwell Publishing, Inc..
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 9 (2007)
Issue (Month): 2 (04)
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=1097-3923|
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=1097-3923|
References listed on IDEAS
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.:
- Garance Genicot & Debraj Ray, 2003.
"Group Formation in Risk-Sharing Arrangements,"
Review of Economic Studies,
Oxford University Press, vol. 70(1), pages 87-113.
- 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.
- 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..
- Richard Cornes & Roger Hartley, 2003.
"Aggregative Public Goods Games,"
NajEcon Working Paper Reviews
- 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.
- Ihori, Toshihiro, 1996. "International public goods and contribution productivity differentials," Journal of Public Economics, Elsevier, vol. 61(1), pages 139-154, July.
- 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.
- 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.
- Jack Hirshleifer, 1983. "From weakest-link to best-shot: The voluntary provision of public goods," Public Choice, Springer, vol. 41(3), pages 371-386, January.
- 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.
- Cornes, Richard & Sandler, Todd, 1984. "Easy Riders, Joint Production, and Public Goods," Economic Journal, Royal Economic Society, vol. 94(375), pages 580-98, September.
- 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.
- repec:cup:cbooks:9780521894753 is not listed on IDEAS
- J. Hirshleifer, 1985. "From weakest-link to best-shot: Correction," Public Choice, Springer, vol. 46(2), pages 221-223, January.
- 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.
- 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.
- 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..
When requesting a correction, please mention this item's handle: RePEc:bla:jpbect:v:9:y:2007:i:2:p:231-263. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.