en
Scientific article
English

Optimal prevention for multiple risks

Published inJournal of Risk and Insurance, vol. 84, no. 3, p. 899-922
Publication date2017
Abstract

This article analyzes optimal prevention in a situation of multiple, possibly correlated risks. We focus on probability reduction (self-protection)so that correlation becomes endogenous. If prevention concerns only one risk, introducing a second exogenous risk increases the level of prevention expenditures, even if correlation is negative. If prevention expenditures may be invested for both risks, a substitution effect arises. Under non-increasing returns on self-protection, we find that increased dependence increases aggregate prevention expenditures, but not necessarily prevention for each risk due to differences in prevention efficiency. Similar results are found when considering changes in the severity of losses. Consequently, the comparative statis enphasize global effects versus allocation effects. Our results have strong policy implications, considering the numerous mandatory safety measures introduced by governments over the past years.

Keywords
  • Economics of risk
  • Risk aversion
  • Prevention
  • Safety
Citation (ISO format)
COURBAGE, Christophe, LOUBERGE, Henri, PETER, Richard. Optimal prevention for multiple risks. In: Journal of Risk and Insurance, 2017, vol. 84, n° 3, p. 899–922. doi: 10.1111/jori.12105
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Article (Published version)
accessLevelRestricted
Identifiers
ISSN of the journal0022-4367
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