Precautionary paying for stochastic improvements under background risks

We study the consequences of introducing random costs (as opposed to certain costs) on the propensity to implement self-protection actions, i.e. actions reducing the probability of a loss. Our analysis is performed in four standard self-protection frameworks: 1) the one-period model in which the cost and benefit occur at the same period of time; 2) a variation of this one-period model where wealth in each state of nature is a random variable; 3) the one-period model where the cost of the self-protection action is only paid in the absence of loss; 4) the two-period model in which the cost of self-protection precedes its benefit. For each of these models we provide a set of conditions ensuring clear-cut effects to occur and a specific interpretation for each of them.

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Precautionary paying for stochastic improvements under background risks

Cited by 8 publications

References 24 publications

Optimal saving and health prevention

Optimal saving and health prevention

Willingness to pay for stochastic improvements of future risk under different risk aversion

Self-protection with random costs

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