Protection in numbers? Self-protection as a local public good

Clive D. Fraser

Journal of Mathematical Economics, 2021, vol. 96, issue C

Abstract: In many contexts with endogenous physical risks – e.g., households, neighbourhood traffic calming, production quality control – risk reduction is a local public good. Risk-reduction incentives then depend on the protected population’s size. Focusing on a household’s physical risks modelled as an i.i.d. Bernoulli trials sequence with endogenous “success” probability, I give sufficient conditions for safety to increase with the number protected via both monotone comparative statics methodology and a “first-order” approach. I utilise a recursive decomposition of a covariance involving a monotonic function of a binomial variable and first-degree stochastic dominance (FSD). Because “protection” problems are generally non-concave, I give a detailed treatment of the second-order condition, again via FSD.

Keywords: Physical risk; Local public good; Binomial recurrence relation; Covariance; Stochastic dominance; Monotone comparative statics (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:96:y:2021:i:c:s0304406821000604

DOI: 10.1016/j.jmateco.2021.102510

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