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The Impact of Prudence on Optimal Prevention Revisited

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Listed:
  • Jingyuan Li
  • Georges Dionne

Abstract

This paper re-examines the link between absolute prudence and self-protection activities. We show that the level of effort chosen by a prudent agent is larger than the optimal effort chosen by a risk-neutral agent if and only if the degree of absolute prudence is less than a threshold that is utility-independent. We explain this threshold by a trade-off between the variation of the variance and the level of the third moment of the loss distribution. We also discuss our result in terms of skewness. Our contribution extends the model of Eeckhoudt and Gollier (2005).

Suggested Citation

  • Jingyuan Li & Georges Dionne, 2010. "The Impact of Prudence on Optimal Prevention Revisited," Cahiers de recherche 1024, CIRPEE.
  • Handle: RePEc:lvl:lacicr:1024
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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2010/CIRPEE10-24.pdf
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    References listed on IDEAS

    as
    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Bruno Jullien & Bernard Salanié & François Salanié, 1999. "Should More Risk-Averse Agents Exert More Effort?," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 24(1), pages 19-28, June.
    3. Kaïs Dachraoui & Georges Dionne & Louis Eeckhoudt & Philippe Godfroid, 2004. "Comparative Mixed Risk Aversion: Definition and Application to Self-Protection and Willingness to Pay," Journal of Risk and Uncertainty, Springer, vol. 29(3), pages 261-276, December.
    4. Dionne, Georges & Eeckhoudt, Louis, 1985. "Self-insurance, self-protection and increased risk aversion," Economics Letters, Elsevier, vol. 17(1-2), pages 39-42.
    5. Eeckhoudt, Louis & Etner, Johanna & Schroyen, Fred, 2009. "The values of relative risk aversion and prudence: A context-free interpretation," Mathematical Social Sciences, Elsevier, vol. 58(1), pages 1-7, July.
    6. 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 623-648, July-Aug..
    7. Wang, Jianli & Li, Jingyuan, 2010. "Multiplicative risk apportionment," Mathematical Social Sciences, Elsevier, vol. 60(1), pages 79-81, July.
    8. Dionne, Georges & Li, Jingyuan, 2011. "The impact of prudence on optimal prevention revisited," Economics Letters, Elsevier, vol. 113(2), pages 147-149.
    9. Louis Eeckhoudt & Christian Gollier, 2005. "The impact of prudence on optimal prevention," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(4), pages 989-994, November.
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    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:

    1. Crainich, David & Eeckhoudt, Louis & Menegatti, Mario, 2016. "Changing risks and optimal effort," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 97-106.
    2. Christian Gollier & James Hammitt & Nicolas Treich, 2013. "Risk and choice: A research saga," Journal of Risk and Uncertainty, Springer, vol. 47(2), pages 129-145, October.
    3. Dionne, Georges & Lebeau, Martin, 2010. "Le calcul de la valeur statistique d’une vie humaine," L'Actualité Economique, Société Canadienne de Science Economique, vol. 86(4), pages 487-530, décembre.
    4. repec:eee:jeborg:v:137:y:2017:i:c:p:19-36 is not listed on IDEAS
    5. Dionne, Georges & Li, Jingyuan, 2011. "The impact of prudence on optimal prevention revisited," Economics Letters, Elsevier, vol. 113(2), pages 147-149.
    6. David Crainich & Louis Eeckhoudt & James Hammitt, 2015. "The value of risk reduction: new tools for an old problem," Theory and Decision, Springer, vol. 79(3), pages 403-413, November.
    7. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    8. Terrapon-Pfaff, Julia & Dienst, Carmen & König, Julian & Ortiz, Willington, 2014. "A cross-sectional review: Impacts and sustainability of small-scale renewable energy projects in developing countries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 40(C), pages 1-10.
    9. repec:eee:indorg:v:53:y:2017:i:c:p:326-352 is not listed on IDEAS
    10. Mario Menegatti, 2012. "New results on optimal prevention of risk averse agents," Economics Bulletin, AccessEcon, vol. 32(3), pages 2166-2173.
    11. Menegatti, Mario & Rebessi, Filippo, 2011. "On the substitution between saving and prevention," Mathematical Social Sciences, Elsevier, vol. 62(3), pages 176-182.
    12. Grimm, Michael & Treibich, Carole, 2016. "Why do some motorbike riders wear a helmet and others don’t? Evidence from Delhi, India," Transportation Research Part A: Policy and Practice, Elsevier, vol. 88(C), pages 318-336.
    13. Xue, Minggao & Cheng, Wen, 2013. "Background risk, bivariate risk attitudes, and optimal prevention," Mathematical Social Sciences, Elsevier, vol. 66(3), pages 390-395.
    14. Kylymnyuk, Dmytro & Wagner, Alexander K., 2012. "Commitment through risk," Economics Letters, Elsevier, vol. 116(3), pages 295-297.
    15. Courbage, Christophe & Rey, Béatrice & Treich, Nicolas, 2013. "Prevention and precaution," TSE Working Papers 13-445, Toulouse School of Economics (TSE).
    16. Jindapon, Paan, 2013. "Do risk lovers invest in self-protection?," Economics Letters, Elsevier, vol. 121(2), pages 290-293.
    17. Mario Menegatti, 2014. "Optimal choice on prevention and cure: a new economic analysis," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 15(4), pages 363-372, May.

    More about this item

    Keywords

    Absolute prudence; Moments of the loss distribution; Self-protection; Variance; Skewness;

    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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