The Self-Protection Problem

Richard Peter ()
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Richard Peter: University of Iowa

A chapter in Handbook of Insurance, 2025, pp 55-82 from Springer

Abstract: Abstract This chapter surveys the technical aspects of the self-protection problem in the expected utility model. Self-protection is a costly investment to reduce the probability of loss. Even in the simplest model with a binary risk of loss, the objective function is not necessarily concave in the level of self-protection, and deriving clean comparative statics has proven notoriously difficult. This chapter discusses the regularity of the self-protection problem, the trade-off between risk aversion and downside risk aversion, and the role of probability thresholds. It presents results about the decision to engage in self-protection (i.e., the extensive margin) and the optimal level of self-protection (i.e., the intensive margin). Recent intertemporal extensions to two periods are also discussed with a focus on the role of saving as a substitute for self-protection.

Keywords: Self-protection; Risk aversion; Downside risk aversion; Prudence; Probability thresholds; Comparative statics (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-69674-9_3

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DOI: 10.1007/978-3-031-69674-9_3

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