Journal article
Optimal Prevention for Multiple Risks
The Journal of risk and insurance, Vol.84(3), pp.899-922
09/2017
DOI: 10.1111/jori.12105
Abstract
This article analyzes optimal prevention in a situation of multiple, possibly correlated risks. We focus on probability reduction (self-protection) so that correlation becomes endogenous. If prevention concerns only one risk, introducing a second exogenous risk increases the level of prevention expenditures, even if correlation is negative. If prevention expenditures may be invested for both risks, a substitution effect arises. Under nonincreasing returns on self-protection, we find that increased dependence increases aggregate prevention expenditures, but not necessarily prevention expenditures for each risk due to differences in prevention efficiency. Similar results are found when considering changes in the severity of losses. Consequently, the comparative statics emphasize global effects versus allocation effects. Our results have strong policy implications, considering the numerous mandatory safety measures introduced by governments over the past years.
Details
- Title: Subtitle
- Optimal Prevention for Multiple Risks
- Creators
- Christophe Courbage - University of Applied Sciences and Arts Western SwitzerlandHenri Louberge - University of GenevaRichard Peter - Univ Iowa, Dept Finance, Henry B Tippie Coll Business, Iowa City, IA 52242 USA
- Resource Type
- Journal article
- Publication Details
- The Journal of risk and insurance, Vol.84(3), pp.899-922
- Publisher
- Wiley
- DOI
- 10.1111/jori.12105
- ISSN
- 0022-4367
- eISSN
- 1539-6975
- Number of pages
- 24
- Language
- English
- Date published
- 09/2017
- Academic Unit
- Finance
- Record Identifier
- 9984380512302771
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