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

20 Pages Posted: 10 Nov 2013

See all articles by Annette Hofmann

Annette Hofmann

St John's University - School of Risk Management

Richard Peter

University of Iowa

Date Written: August 1, 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 (August 1, 2013). Available at SSRN: https://ssrn.com/abstract=2352229 or http://dx.doi.org/10.2139/ssrn.2352229

Annette Hofmann (Contact Author)

St John's University - School of Risk Management ( email )

8000 Utopia Parkway
Queens, NY 11439
United States

Richard Peter

University of Iowa ( email )

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

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