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A note on risky targets and effort

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  • Wong, Kit Pong

Abstract

This note examines the effort choice problem of a decision maker (DM) who has to meet a target. The more the DM spends on effort, the more likely the target is reached. Besides the risk of missing the target despite his effort, the DM faces additional uncertainty in that both the target and the status quo are subject to exogenous shocks that are beyond the DM’s control. We consider two cases: the additive case in which the DM’s effort affects solely the likelihood of achieving the target, and the multiplicative case in which the DM’s effort also has direct effect on the target and the status quo. Using the theory of monotone comparative statics and risk apportionment, we derive sufficient conditions under which the DM spends more on effort when the target experiences an improvement in risk via higher-order stochastic dominance.

Suggested Citation

  • Wong, Kit Pong, 2017. "A note on risky targets and effort," Insurance: Mathematics and Economics, Elsevier, vol. 73(C), pages 27-30.
    • Handle: RePEc:eee:insuma:v:73:y:2017:i:c:p:27-30
    DOI: 10.1016/j.insmatheco.2017.01.001
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    Cited by:

    1. Wong, Kit Pong, 2021. "Comparative risk aversion with two risks," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    2. Wong, Kit Pong, 2022. "Diversification and risk attitudes toward two risks," Journal of Mathematical Economics, Elsevier, vol. 102(C).
    3. Desu Liu & Mario Menegatti, 2019. "Optimal saving and health prevention," Journal of Economics, Springer, vol. 128(2), pages 177-191, October.
    4. Wang, Jianli & Wang, Hongxia & Yick, Ho Yin, 2019. "How do changes in risk and risk aversion affect self-protection with Selden/Kreps–Porteus preferences?," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 1-6.
    5. Crainich, David & Menegatti, Mario, 2021. "Self-protection with random costs," Insurance: Mathematics and Economics, Elsevier, vol. 98(C), pages 63-67.
    6. Kit Pong Wong, 2019. "An interpretation of the condition for precautionary saving: the case of greater higher-order interest rate risk," Journal of Economics, Springer, vol. 126(3), pages 275-286, April.
    7. Dennis W. Jansen & Liqun Liu, 2022. "Portfolio choice in the model of expected utility with a safety-first component," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 45(1), pages 187-207, June.

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    More about this item

    Keywords

    Monotone comparative statics; Risk apportionment; Stochastic dominance; Effort; Risky targets;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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