Precautionary motives with multiple instruments

Motifs de précaution en cas de multiples instruments

Christoph Heinzel () and Richard Peter
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Christoph Heinzel: SMART-LERECO - Structures et Marché Agricoles, Ressources et Territoires - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - INSTITUT AGRO Agrocampus Ouest - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement
Richard Peter: University of Iowa

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Abstract: Using a unified approach, we show how precautionary saving, self-protection and self-insurance are jointly determined by risk preferences and the preference over the timing of uncertainty resolution. We cover higher-order risk effects and examine both risk averters and risk lovers. When decision-makers use several instruments simultaneously to respond to income risk, substitutive interaction effects arise. We quantify precautionary and substitution effects numerically and discuss the role of instrument interaction for the inference of preference parameters from precautionary motives. Instruments can differ substantially in the size of the precautionary motive and in the susceptibility to substitution effects. This affects their suitability for the identification of precautionary preferences.

Keywords: Recursive preferences; Prudence; Precautionary behavior; Interaction effects; Comparative statics; Préférences récursives; Comportement de précaution; Effets d’interaction; Statique comparative (search for similar items in EconPapers)
Date: 2021-12-17
New Economics Papers: this item is included in nep-rmg and nep-upt
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