The impact of prudence on optimal prevention revisited
American Risk and Insurance Association (ARIA) 2011 Annual Meeting
Absolute prudence, Moments of the loss distribution, Self-protection, Variance, Skewness
This paper re-examines the link between absolute prudence and self-protection activities. We show that the level of effort chosen by an agent with positive and decreasing absolute prudence is larger than the optimal effort chosen by a risk-neutral agent if the degree of absolute prudence is less than a threshold that is utility-independent and empirically verifiable. We explain this threshold by a trade-off between the variation of the variance and the level of the third moment of the loss distribution. We also discuss our result in terms of skewness. Our contribution extends the models of Eeckhoudt and Gollier (2005) and Chiu (2005b).
Dionne, G., & Li, J. (2011, Aug). The impact of prudence on optimal prevention revisited. Paper presented at American Risk and Insurance Association (ARIA) 2011 Annual Meeting, San Diego, CA.