Optimal Prevention for Multiple Risks

24 Pages Posted: 15 Aug 2017

See all articles by Christophe Courbage

Christophe Courbage

Haute Ecole de Gestion de Genève - University of Applied Sciences Western Switzerland (HES-SO)

Henri Loubergé

University of Geneva - Geneva School of Economics and Management; Swiss Finance Institute

Richard Peter

University of Iowa

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Date Written: September 2017

Abstract

This article analyzes optimal prevention in a situation of multiple, possibly correlated risks. We focus on probability reduction (self‐protection) so that correlation becomes endogenous. If prevention concerns only one risk, introducing a second exogenous risk increases the level of prevention expenditures, even if correlation is negative. If prevention expenditures may be invested for both risks, a substitution effect arises. Under nonincreasing returns on self‐protection, we find that increased dependence increases aggregate prevention expenditures, but not necessarily prevention expenditures for each risk due to differences in prevention efficiency. Similar results are found when considering changes in the severity of losses. Consequently, the comparative statics emphasize global effects versus allocation effects. Our results have strong policy implications, considering the numerous mandatory safety measures introduced by governments over the past years.

Suggested Citation

Courbage, Christophe and Loubergé, Henri and Peter, Richard, Optimal Prevention for Multiple Risks (September 2017). Journal of Risk and Insurance, Vol. 84, Issue 3, pp. 899-922, 2017, Available at SSRN: https://ssrn.com/abstract=3018863 or http://dx.doi.org/10.1111/jori.12105

Christophe Courbage (Contact Author)

Haute Ecole de Gestion de Genève - University of Applied Sciences Western Switzerland (HES-SO) ( email )

Geneva
Switzerland

Henri Loubergé

University of Geneva - Geneva School of Economics and Management ( email )

Uni Mail
Bd du Pont-d'Arve 40
Geneva, 1211
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Richard Peter

University of Iowa ( email )

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

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