Effect of increase in risk aversion on self-insurance in dynamic model

Abstract

This work shows that in a two-period framework increase in risk-aversion is not a sufficient condition to invest more in self-insurance, as it is in one-period setting (Dionne and Eeckhoudt). We prove that other factors important for decision-making exist. Rela-tionship between size of loss and future and present income is crucial in this problem. We consider two cases – when an effort to prevent risk precedes its effect and when it is sim-ultaneous. We show that those cases are mathematically and economically different.

Keywords

• Self-insurance
• Risk aversion
• Dynamic model