Title

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.

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Full-text Version

Publisher’s Version

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