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Optimal self-protection in two periods: On the role of endogenous saving

Listed author(s):
  • Peter, Richard
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    Self-protection is a costly investment to reduce the probability of loss. This paper studies optimal self-protection in a two-period model with endogenous saving. In a setting with a binary loss we show that prudence is negatively associated with the optimal level of self-protection, consistent with results obtained in single-period models. We provide intuition for this finding with the help of a recent approach based on stochastic dominance. Furthermore, we determine the effect of interest rate risk on optimal self-protection and study a model in which a decision-maker engages in advance effort to increase the probability of facing a better risky situation. All our results suggest that the understanding of advance self-protection crucially hinges on whether the decision-maker also uses saving to optimize intertemporal consumption utility. If so, the fact that self-protection expenditures are upfront turns out to be irrelevant.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167268117300252
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    Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

    Volume (Year): 137 (2017)
    Issue (Month): C ()
    Pages: 19-36

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    Handle: RePEc:eee:jeborg:v:137:y:2017:i:c:p:19-36
    DOI: 10.1016/j.jebo.2017.01.017
    Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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