The Value of Risk Reduction: New Tools for an Old Problem

David Crainich, Louis Eeckhoudt and James Hammitt

No 2013-ECO-13, Working Papers from IESEG School of Management

Abstract: The relationship between willingness to pay (WTP) to reduce the probability of an adverse event and the degree of risk aversion is ambiguous. The ambiguity arises because paying for protection worsens the outcome in the event the adverse event occurs, which influences the expected marginal utility of wealth. Using concepts of prudence (equivalently, downside risk aversion), we characterize the marginal WTP to reduce the probability of the adverse event as the product of WTP in the case of risk neutrality and an adjustment factor. For the univariate case (e.g., risk of financial loss), the adjustment factor depends on risk aversion and prudence with respect to wealth. For the bivariate case (e.g., risk of death or illness), the adjustment factor depends on risk aversion and cross-prudence in wealth.

Keywords: value per statistical life; mortality risk; risk aversion; prudence (search for similar items in EconPapers)
JEL-codes: D8 I1 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2013-06
New Economics Papers: this item is included in nep-age, nep-mic, nep-rmg and nep-upt
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Related works:
Journal Article: The value of risk reduction: new tools for an old problem (2015)
Working Paper: The value of risk reduction: new tools for an old problem (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ies:wpaper:e201313

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