Self-Insurance, Self-Protection, and Increased Risk Aversion: An Intertemporal Reinvestigation
20 Pages Posted: 10 Nov 2013
Date Written: August 1, 2013
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: Suggested Citation