Cross‐Prudence and Optimal Prevention

Jingyuan Li; Richard Peter; Lin Zhou

doi:10.1111/iere.70092

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Journal article

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Cross‐Prudence and Optimal Prevention

Jingyuan Li, Richard Peter and Lin Zhou

International economic review (Philadelphia)

07/24/2026

DOI: 10.1111/iere.70092

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Abstract

In this paper, we study optimal prevention in the presence of a correlated nonfinancial background risk. Under positive correlation, cross‐prudence in the nonfinancial attribute reduces optimal prevention. We establish this result in the most direct extension of the standard prevention problem with binary marginal distributions and show that it extends to richer settings. Our analysis highlights a broader implication: in economically relevant cases with loss probabilities below one‐half and positive correlation, cross‐prudence emerges as an additional force that discourages prevention. As a result, optimal prevention can fall below the expected‐cost minimizing level, even when agents are risk‐averse.

bivariate risk

correlation

cross-prudence

prevention

self-protection

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Details

Title: Subtitle: Cross‐Prudence and Optimal Prevention
Creators: Jingyuan Li - Lingnan University
Richard Peter - University of Iowa
Lin Zhou - Lingnan University
Resource Type: Journal article
Publication Details: International economic review (Philadelphia)
DOI: 10.1111/iere.70092
ISSN: 0020-6598
eISSN: 1468-2354
Publisher: Wiley
Language: English
Electronic publication date: 07/24/2026
Academic Unit: Economics; Finance
Record Identifier: 9985215766602771

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