The Value of Risk Reduction

Crainich, David, Eeckhoudt, Louis and Hammitt, James K. (2015) The Value of Risk Reduction: New Tools for an Old Problem. Theory and Decision, vol. 79 (n° 3). pp. 403-413.

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Official URL: http://tse-fr.eu/pub/30290

Abstract

The relationship between willingness to pay (WTP) to reduce the probability of an adverse event and the degree of risk aversion is ambiguous. The ambiguity arises because paying for protection worsens the outcome in the event the adverse event occurs, which influences the expected marginal utility of wealth. Using the concept of downside risk aversion or prudence, we characterize the marginal WTP to reduce the probability of the adverse event as the product of WTP in the case of risk neutrality and an adjustment factor. For the univariate case (e.g., risk of financial loss), the adjustment factor depends on risk aversion and prudence with respect to wealth. For the bivariate case (e.g., risk of death or illness), the adjustment factor depends on risk aversion and cross-prudence in wealth.

Item Type: Article
Sub-title: New Tools for an Old Problem
Language: English
Date: November 2015
Refereed: Yes
Uncontrolled Keywords: Risk aversion, prudence, self-protection, value per statistical life
JEL codes: D8 - Information, Knowledge, and Uncertainty
I1 - Health
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 15 Mar 2016 11:06
Last Modified: 07 Mar 2018 13:23
OAI ID: oai:tse-fr.eu:30290
URI: http://publications.ut-capitole.fr/id/eprint/19972

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