The Impact of Ambiguity Prudence on Insurance and Prevention

Loïc Berger

No 2015.15, Working Papers from Fondazione Eni Enrico Mattei

Abstract: Most decisions concerning (self-)insurance and self-protection have to be taken in situations in which a) the effort exerted precedes the moment uncertainty realises, and b) the probabilities of future states of the world are not perfectly known. By integrating these two characteristics in a simple theoretical framework, this paper derives plausible conditions under which ambiguity aversion raises the demand for (self-)insurance and self-protection. In particular, it is shown that in most usual situations where the level of ambiguity does not increase with the level of effort, a simple condition of ambiguity prudence known as decreasing absolute ambiguity aversion (DAAA) is sufficient to give a clear and positive answer to the question: Does ambiguity aversion raise the optimal level of effort?

Keywords: Non-expected Utility; Self-protection; Self-insurance; Ambiguity Prudence (search for similar items in EconPapers)
JEL-codes: D61 D81 D91 G11 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-ias and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: The Impact of Ambiguity Prudence on Insurance and Prevention (2015)
Working Paper: The Impact of Ambiguity Prudence on Insurance and Prevention (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2015.15

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