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

David Crainich, Louis Eeckhoudt and James Hammitt

Post-Print from HAL

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.

Keywords: Risk aversion; Prudence; Self-protection; Value per statistical life (search for similar items in EconPapers)
Date: 2014-10
References: Add references at CitEc
Citations:

Published in Theory and Decision, 2014, 79 (3), pp.403--413. ⟨10.1007/s11238-014-9475-7⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: The value of risk reduction: new tools for an old problem (2015)
Working Paper: The Value of Risk Reduction: New Tools for an Old Problem (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01533560

DOI: 10.1007/s11238-014-9475-7

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().