Self-protection with random costs

David Crainich and Mario Menegatti

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Abstract: We study the consequences of introducing random costs (as opposed to certain costs) on the propensity to implement self-protection actions, i.e. actions reducing the probability of a loss. Our analysis is performed in four standard self-protection frameworks: (1) the one-period model in which the cost and benefit occur at the same period of time; (2) a variation of this one-period model where wealth in each state of nature is a random variable; (3) the one-period model where the cost of the self-protection action is only paid in the absence of loss; (4) the two-period model in which the cost of self-protection precedes its benefit. For each of these models we provide a set of conditions ensuring clear-cut effects to occur and a specific interpretation for each of them.

Keywords: Risk aversion; Prudence; Prevention; Random costs of self-protection; Self-protection (search for similar items in EconPapers)
Date: 2021-05
Note: View the original document on HAL open archive server: https://hal.science/hal-03273664
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Citations: View citations in EconPapers (2)

Published in Insurance: Mathematics and Economics, 2021, 98, pp.63-67. ⟨10.1016/j.insmatheco.2021.02.006⟩

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Journal Article: Self-protection with random costs (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03273664

DOI: 10.1016/j.insmatheco.2021.02.006

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