Dynamic Endogenous Risks & Non-Expected Utility Behavior

Ram Ranjan and Jason Shogren

Korean Economic Review, 2009, vol. 25, 215-240

Abstract: The theory of endogenous risk captures the idea that people self-protect and self-insure to reduce risks to human and environmental health. Herein we extend the standard static model to include the realities of (1) dynamic and multiple risks, and (2) non-expected utility (non-EU) behavior. Our results suggest both self-protection and self-insurance decrease for any one risk when cumulative dynamic risks are large and when multiple risks exist. If people are non-EU maximizers, self-protection and self-insurance also decline when they follow the conservatism heuristic (insufficient weighting of new information). In addition, if non-EU people over- and under-weight probabilities of bad states, they can invest non-linearly in self-protection and self-insurance.

Keywords: Self-insurance; Self-Protection; Perception; Probability Weighting; Risk Resilience (search for similar items in EconPapers)
JEL-codes: D8 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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