Ambiguity aversion, higher-order risk attitude and optimal effort

Rachel Huang

Insurance: Mathematics and Economics, 2012, vol. 50, issue 3, 338-345

Abstract: In this paper, we examine whether a more ambiguity-averse individual will invest in more effort to shift her initial starting wealth distribution toward a better target distribution. We assume that the individual has ambiguous beliefs regarding two target (starting) distributions and that one distribution is preferred to the other. We find that an increase in ambiguity aversion will decrease (increase) the optimal effort when the cost of effort is non-monetary. When the cost of effort is monetary, the effect depends on whether the individual would make more effort when the target (starting) distribution is the preferred distribution than the target (starting) distributions, the inferior one. We further characterize the individual’s higher-order risk preferences to examine the sufficient conditions.

Keywords: Effort; Prevention; Self-protection; Ambiguity (search for similar items in EconPapers)
JEL-codes: D80 D81 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:50:y:2012:i:3:p:338-345

DOI: 10.1016/j.insmatheco.2012.01.002

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