Self-protection under Nth-degree risk increase of random unit cost

Yongjin Yin and Shengwang Meng

Insurance: Mathematics and Economics, 2025, vol. 122, issue C, 137-142

Abstract: Cost risk, as a type of multiplicative risk, should be given more attention in decision-making issues. Crainich and Menegatti (2021) have studied the effects of introducing random unit cost in self-protection under the four standard self-protection model frameworks. They focus on the case where the unit cost of effort in self-protection changes from certainty (denoted asc) to randomness (denoted asc˜) with E[c˜]=c, which represents second-degree risk increase in Ekern (1980). In this paper, we generalize the concept of second-degree risk increase to Nth-degree risk increase and provide sufficient conditions for increasing or decreasing effort in self-protection, which are closely related to the parity of the order of the risk change and decision-maker's higher-order risk attitudes. We use the multiplicative effect and apportionment effect to explain the decision-maker's preference conditions.

Keywords: Random unit cost of self-protection; Higher-degree risk increase; Higher-order risk attitudes; Multiplicative effect; Apportionment effect (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:122:y:2025:i:c:p:137-142

DOI: 10.1016/j.insmatheco.2025.02.004

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