Comparative Risk Aversion in Two Periods: An Application to Self-Insurance and Self-Protection
Munich Risk and Insurance Center Working Paper 34, 2019
27 Pages Posted: 24 Sep 2019
Date Written: September 16, 2019
Risk management decisions provide a candidate to elicit people's risk preferences empirically. In such a context, the literature often presumes that the decision to invest in risk management and the benefit of this investment occur contemporaneously. However, there is no consensus in the theoretical literature that one-period results can be transferred to intertemporal settings. To fill this gap, we study the effect of an increase in risk aversion on the demand for risk management in a two-period context. Our findings reproduce the one-period results and thus support previous empirical literature in its focus on the structure of the risk rather than the time structure of investments and benefits.
Keywords: Self-Insurance, Self-Protection, Saving, Comparative Risk Aversion
JEL Classification: D61, D81, D91
Suggested Citation: Suggested Citation