Background risk, bivariate risk attitudes, and optimal prevention

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• 作者：Minggao Xue ; Wen Cheng
• 刊名：Mathematical Social Sciences
• 出版年：November, 2013
• 年：2013
• 卷：66
• 期：3
• 页码：390-395
• 全文大小：391 K

文摘

This paper extends results for precautionary effort to bivariate utility function framework. We establish an equivalence between the agent鈥檚 precautionary effort motive and the signs of successive cross-derivatives of the bivariate utility function. We show that the introduction (or deterioration) of an independent background risk induces more prevention to protect against wealth loss provided the individual exhibits correlation aversion of some given order. The conditions on the individual鈥檚 risk preferences are given to generate some specific prevention behaviors in the univariate framework with multiplicative risks. Our conclusion also indicates that an increase in the correlation between wealth risk and background risk leads to a reduction in optimal prevention.