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Self-protection under Nth-degree risk increase of random unit cost

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  • Yin, Yongjin
  • Meng, Shengwang

Abstract

Cost risk, as a type of multiplicative risk, should be given more attention in decision-making issues. Crainich and Menegatti (2021) have studied the effects of introducing random unit cost in self-protection under the four standard self-protection model frameworks. They focus on the case where the unit cost of effort in self-protection changes from certainty (denoted asc) to randomness (denoted asc˜) with E[c˜]=c, which represents second-degree risk increase in Ekern (1980). In this paper, we generalize the concept of second-degree risk increase to Nth-degree risk increase and provide sufficient conditions for increasing or decreasing effort in self-protection, which are closely related to the parity of the order of the risk change and decision-maker's higher-order risk attitudes. We use the multiplicative effect and apportionment effect to explain the decision-maker's preference conditions.

Suggested Citation

  • Yin, Yongjin & Meng, Shengwang, 2025. "Self-protection under Nth-degree risk increase of random unit cost," Insurance: Mathematics and Economics, Elsevier, vol. 122(C), pages 137-142.
    • Handle: RePEc:eee:insuma:v:122:y:2025:i:c:p:137-142
    DOI: 10.1016/j.insmatheco.2025.02.004
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    References listed on IDEAS

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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