Precautionary risk-reduction and saving decisions: Two sides of the same coin?

Richard Peter and Annette Hofmann

Insurance: Mathematics and Economics, 2024, vol. 118, issue C, 175-194

Abstract: We provide new results about the comparative static effects of income risk and interest rate risk on optimal risk-reduction and saving decisions. We combine arguments from the risk apportionment literature with monotone comparative statics. Risk reduction and saving are Edgeworth-Pareto substitutes for (mixed) risk averters and Edgeworth-Pareto complements for (mixed) risk lovers. For changes in income risk, risk reduction and saving are Nth-degree risk complements for risk lovers. For changes in interest rate risk, risk reduction and saving are Nth-degree risk substitutes for risk averters. The individual's risk attitude and the source of risk thus co-determine the effects of risk changes on optimal. We also discuss several extensions including multiple loss states, higher-order risk reduction, stochastic dominance, non-separable utility, and inflation risk.

Keywords: Changes in risk; Precaution; Risk apportionment; Monotone comparative statics; Income risk; Interest rate risk (search for similar items in EconPapers)
JEL-codes: D81 D90 D91 E21 G22 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:118:y:2024:i:c:p:175-194

DOI: 10.1016/j.insmatheco.2024.07.001

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