The Impact of Ambiguity Prudence on Insurance and Prevention

Most decisions concerning (self-)insurance and self-protection have to be taken in situations in which a) the effort exerted precedes the moment uncertainty realises, and b) the probabilities of future states of the world are not perfectly known. By integrating these two characteristics in a simple theoretical framework, this paper derives plausible conditions under which ambiguity aversion raises the demand for (self-)insurance and self-protection. In particular, it is shown that in most usual situations where the level of ambiguity does not increase with the level of effort, a simple condition of ambiguity prudence known as decreasing absolute ambiguity aversion (DAAA) is sufficient to give a clear and positive answer to the question: Does ambiguity aversion raise the optimal level of effort?


Issue Date:
Feb 27 2015
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/198893
Total Pages:
23
JEL Codes:
D61; D81; D91; G11
Series Statement:
CCSD
015.2015




 Record created 2017-04-01, last modified 2017-08-28

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