Self‐Insurance, Self‐Protection, and Saving: On Consumption Smoothing and Risk Management

16 Pages Posted: 9 Aug 2016

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 2016

Abstract

This article studies the effect of risk preferences on self‐insurance and self‐protection in a two‐period expected utility framework. Here the investment to reduce risk precedes its effect. In contrast to single‐period models, self‐insurance and self‐protection react similarly when the agent's utility function becomes more concave. Effort is increased if and only if current consumption is sufficiently large. However, if we introduce endogenous saving, an agent with more concave utility always selects more self‐insurance, but will select more self‐protection if and only if the probability of loss is small enough. These latter results concur with those in standard monoperiodic models with no saving.

Suggested Citation

Hofmann, Annette and Peter, Richard, Self‐Insurance, Self‐Protection, and Saving: On Consumption Smoothing and Risk Management (September 2016). Journal of Risk and Insurance, Vol. 83, Issue 3, pp. 719-734, 2016, Available at SSRN: https://ssrn.com/abstract=2820367 or http://dx.doi.org/10.1111/jori.12060

Annette Hofmann (Contact Author)

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

Von-Melle-Park 5
Hamburg, 20146
Germany

Richard Peter

University of Iowa ( email )

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

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