Precautionary paying for stochastic improvements under background risks
Document Type
Journal article
Source Publication
Insurance : Mathematics and Economics
Publication Date
9-1-2015
Volume
64
First Page
180
Last Page
185
Keywords
Background risk, Stochastic improvements, Cross-prudence, Precautionary saving, Precautionary effort
Abstract
In a two-dimensional framework, we propose a general two-period decision model which extends the temporal precautionary saving and effort model. We relate the role of cross-prudence to the impact of background risks on paying for stochastic improvements of the future risk. We find that the effect of background risks introduced in the first period is consistent to signing cross derivatives of bivariate utility functions, which is independent of the type of stochastic improvements brought by additional paying; however, when the background risk occurs in the second period, that is not the case.
DOI
10.1016/j.insmatheco.2015.05.012
Print ISSN
01676687
E-ISSN
18735959
Publisher Statement
Copyright © 2015 Elsevier B.V.
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Wang, H., Wang, J., & Li, J., & Xia, X. (2015). Precautionary paying for stochastic improvements under background risks. Insurance: Mathematics and Economics, 64, 180-185. doi: 10.1016/j.insmatheco.2015.05.012