The impact of prudence on optimal prevention revisited

Jingyuan Li and Georges Dionne ()

No 10-4, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: This paper re-examines the link between absolute prudence and self-protection activities. We show that the level of effort chosen by an agent with positive and decreasing absolute prudence is larger than the optimal effort chosen by a risk-neutral agent if the degree of absolute prudence is less than a threshold that is utility-independent and empirically verifiable. We explain this threshold by a trade-off between the variation of the variance and the level of the third moment of the loss distribution. We also discuss our result in terms of skewness. Our contribution extends the model of Eeckhoudt and Gollier (2005).

Keywords: Absolute prudence; moments of the loss distribution; self-protection; variance; skewness (search for similar items in EconPapers)
JEL-codes: D61 D81 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2010-08-31
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Related works:
Journal Article: The impact of prudence on optimal prevention revisited (2011)
Working Paper: The Impact of Prudence on Optimal Prevention Revisited (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2010_004

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