Optimal prevention for multiple risks

Courbage, Christophe (Haute école de gestion de Genève, HES-SO // Haute Ecole Spécialisée de Suisse Occidentale) ; Loubergé, Henri (University of Geneva and Swiss Finance Institute) ; Peter, Richard (Department of Finance, Henry B. Tippie College of Business, University of Iowa)

This paper 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 expenditures for each risk due to differences in prevention efficiency. Similar results are found when considering changes in the severity of losses. Consequently, the comparative statics emphasize 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:
Article Type:
scientifique
School:
HEG-GE
Institute:
Centre de Recherche Appliquée en Gestion
Subject(s):
Économie/gestion
Date:
2017
Pagination:
899-922
Host Journal:
Journal of risk and insurance
Numeration (vol. no.):
2017, Vol. 84, no 3, pp. 899-922
DOI:
ISSN:
0022-4367
Embargo date::
2018-09-03
Appears in Collection:

Note: The file is under embargo until: 2018-09-03


 Record created 2017-09-04, last modified 2017-11-20

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