Precautionary Effort: A New Look

Abstract

While the concept of precautionary saving is well documented, that of precautionary effort has received relatively limited attention. In this note, we set up a two period model in order to analyze the conditions under which the introduction (or deterioration) of an independent background risk increases effort.

Prevention and Precaution

“…Finally, in two simultaneous and independent papers, Courbage and Rey (2011) and Eeckhoudt et al (2011) looked at the impact of both the presence and an increase of a background risk on optimal self-protection activities using a two-period model as introduced …”

Precautionary paying for stochastic improvements under background risks

“…Nocetti (forthcoming) uses a similar approach to extend the conclusion of Eeckhoudt et al (2012) and Crainich et al (2013). 6 Thanks to a referee for pointing out this reference.…”

“…5 For the precautionary effort model, Wang and Li (in press) also extend the conclusion of Eeckhoudt et al (2012) by making no assumptions about the sign of the second derivative of the utility function and about the marginal productivity of self-protection efforts. Nocetti (forthcoming) uses a similar approach to extend the conclusion of Eeckhoudt et al (2012) and Crainich et al (2013).…”

“…3 See Kimball (1990), Eeckhoudt and Schlesinger (2008), Courbage and Rey (2012), Eeckhoudt et al (2012), Crainich et al (2013), Wang and Li (in press) and Nocetti (forthcoming). 4 The term ''prudence'' is introduced by Kimball (1990).…”

The Impact of Prudence on Optimal Prevention Revisited

“…We do not consider the mean-preserving condition in this paper. Eeckhoudt et al (2010) and Dachraoui et al (2004) consider background risk as well.…”