Who Should Exert More Effort? Risk Aversion, Downside Risk Aversion and Optimal Prevention
28 Pages Posted: 20 May 2019
Date Written: May 6, 2019
I provide new results on how risk preferences affect optimal prevention. I identify a comparative risk aversion and a comparative downside risk aversion effect and emphasize those cases where both effects are aligned. Alignment depends on a probability threshold, which, in turn, only depends on the preferences of a benchmark agent. This allows to define an entire class of decision-makers who all share the same comparative static prediction relative to the reference agent. I interpret my results in terms of Arrow-Pratt risk aversion and the Schwarzian derivative, and also study several classes of parametric preferences changes.
Keywords: risk aversion, downside risk aversion, prevention, self-protection
JEL Classification: D61, D81
Suggested Citation: Suggested Citation