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Risk aversion, prudence and self-insurance-cum-protection

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  • Peter, Richard
  • Zhang, Jian

Abstract

Self-insurance-cum-protection (SICP) reduces both the probability and the severity of loss. In an expected utility model with a binary risk of loss, we derive conditions under which the SICP problem is quasiconcave and admits an interior maximizer. We then characterize how increased risk aversion affects optimal SICP. Prudence reduces optimal SICP, whereas the effect of risk aversion depends on a benchmark-specific probability threshold. Above this threshold, risk aversion and prudence reinforce each other; below it, they operate in opposite directions. This broadens the scope of the negative prudence effect from pure self-protection to SICP.

Suggested Citation

  • Peter, Richard & Zhang, Jian, 2026. "Risk aversion, prudence and self-insurance-cum-protection," Economics Letters, Elsevier, vol. 264(C).
    • Handle: RePEc:eee:ecolet:v:264:y:2026:i:c:s0165176526001448
    DOI: 10.1016/j.econlet.2026.112950
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    Keywords

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    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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