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Ambiguity aversion, higher-order risk attitude and optimal effort

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  • Huang, Rachel J.

Abstract

In this paper, we examine whether a more ambiguity-averse individual will invest in more effort to shift her initial starting wealth distribution toward a better target distribution. We assume that the individual has ambiguous beliefs regarding two target (starting) distributions and that one distribution is preferred to the other. We find that an increase in ambiguity aversion will decrease (increase) the optimal effort when the cost of effort is non-monetary. When the cost of effort is monetary, the effect depends on whether the individual would make more effort when the target (starting) distribution is the preferred distribution than the target (starting) distributions, the inferior one. We further characterize the individual’s higher-order risk preferences to examine the sufficient conditions.

Suggested Citation

  • Huang, Rachel J., 2012. "Ambiguity aversion, higher-order risk attitude and optimal effort," Insurance: Mathematics and Economics, Elsevier, vol. 50(3), pages 338-345.
    • Handle: RePEc:eee:insuma:v:50:y:2012:i:3:p:338-345
    DOI: 10.1016/j.insmatheco.2012.01.002
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    Cited by:

    1. Richard Peter, 2021. "Who should exert more effort? Risk aversion, downside risk aversion and optimal prevention," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1259-1281, June.
    2. Robert, Christian Y. & Therond, Pierre-E., 2014. "Distortion Risk Measures, Ambiguity Aversion And Optimal Effort," ASTIN Bulletin, Cambridge University Press, vol. 44(2), pages 277-302, May.
    3. Crainich, David & Menegatti, Mario, 2021. "Self-protection with random costs," Insurance: Mathematics and Economics, Elsevier, vol. 98(C), pages 63-67.
    4. Mario Menegatti, 2018. "Prudence and Different Kinds of Prevention," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 44(2), pages 273-285, April.
    5. Xu, Jing, 2022. "Competition and equilibrium effort choice," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    6. Huang, Yi-Chieh & Tzeng, Larry Y. & Zhao, Lin, 2015. "Comparative ambiguity aversion and downside ambiguity aversion," Insurance: Mathematics and Economics, Elsevier, vol. 62(C), pages 257-269.
    7. repec:hal:wpaper:hal-00813199 is not listed on IDEAS
    8. Huang, Rachel J. & Huang, Yi-Chieh & Tzeng, Larry Y., 2013. "Insurance bargaining under ambiguity," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 812-820.
    9. Mario Menegatti, 2021. "Subsidizing risk prevention," Journal of Economics, Springer, vol. 134(2), pages 175-193, October.

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    More about this item

    Keywords

    Effort; Prevention; Self-protection; Ambiguity;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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