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Background risk, bivariate risk attitudes, and optimal prevention

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  • Xue, Minggao
  • Cheng, Wen

Abstract

This paper extends Eeckhoudt et al.’s (2012) results for precautionary effort to bivariate utility function framework. We establish an equivalence between the agent’s 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’s 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.

Suggested Citation

  • Xue, Minggao & Cheng, Wen, 2013. "Background risk, bivariate risk attitudes, and optimal prevention," Mathematical Social Sciences, Elsevier, vol. 66(3), pages 390-395.
    • Handle: RePEc:eee:matsoc:v:66:y:2013:i:3:p:390-395
    DOI: 10.1016/j.mathsocsci.2013.08.006
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    Cited by:

    1. Mario Menegatti, 2018. "Prudence and Different Kinds of Prevention," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 44(2), pages 273-285, April.
    2. Wong, Kit Pong, 2021. "Comparative risk aversion with two risks," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    3. Crainich, David & Eeckhoudt, Louis & Courtois, Olivier Le, 2020. "Intensity of preferences for bivariate risk apportionment," Journal of Mathematical Economics, Elsevier, vol. 88(C), pages 153-160.
    4. Mario Menegatti, 2021. "Subsidizing risk prevention," Journal of Economics, Springer, vol. 134(2), pages 175-193, October.

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