Self-Insurance, Self-Protection and Increased Risk Aversion: An Intertemporal Reinvestigation

Munich Risk and Insurance Center Working Paper 22

22 Pages Posted: 7 Sep 2013

See all articles by Annette Hofmann

Annette Hofmann

Institute for Risk and Insurance - Faculty of Economics and Social Sciences

Richard Peter

University of Iowa

Date Written: September 6, 2013

Abstract

This paper studies the effect of increased risk aversion on self-insurance and self-protection in a two-period expected utility framework in which the risk-reducing investment precedes its effect. In contrast to monoperiodic models, self-insurance and self-protection react very similarly to an increase in risk aversion, i.e., increased risk aversion is associated with more effort if and only if current consumption is sufficiently large. Only if savings are endogenized, the classical findings are recouped. Then, increased risk aversion leads to more self-insurance in any case, and increased risk aversion leads to more self-protection if and only if the loss probability is below an endogenous threshold, extending results obtained by Dionne and Eeckhoudt (1985).

Keywords: self-insurance, self-protection, saving, risk aversion

JEL Classification: D61, D81, D91

Suggested Citation

Hofmann, Annette and Peter, Richard, Self-Insurance, Self-Protection and Increased Risk Aversion: An Intertemporal Reinvestigation (September 6, 2013). Munich Risk and Insurance Center Working Paper 22, Available at SSRN: https://ssrn.com/abstract=2321607 or http://dx.doi.org/10.2139/ssrn.2321607

Annette Hofmann

Institute for Risk and Insurance - Faculty of Economics and Social Sciences ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

Richard Peter (Contact Author)

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

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