Comparative Risk Aversion, Comparative Prudence, and Two-Period Self Protection

Abstract

In this paper we show how the intensity of risk aversion and prudence affects the optimal level of self protection in a two-period model. It is found that unlike in the single-period model, the effect of an increase in prudence on the effort is positive, which is consistent with Menegatti's (2009) finding in a two-period model that a prudent agent exerts more effort than a risk neutral agent.

Keywords: self protection, risk aversion, prudence, two-period

JEL Classification: D61, D81