The value of risk reduction: new tools for an old problem

David Crainich, Louis Eeckhoudt and James Hammitt

Theory and Decision, 2015, vol. 79, issue 3, 403-413

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 the concept of downside risk aversion or prudence, 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. Copyright Springer Science+Business Media New York 2015

Keywords: Risk aversion; Prudence; Self-protection; Value per statistical life; D8; I1 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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Working Paper: The value of risk reduction: new tools for an old problem (2014)
Working Paper: The Value of Risk Reduction: New Tools for an Old Problem (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:theord:v:79:y:2015:i:3:p:403-413

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DOI: 10.1007/s11238-014-9475-7

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