The Impact of Ambiguity Prudence on Insurance and Prevention

Abstract

The I on

Comparative Ambiguity Aversion in Intertemporal Decisions

“…These assumptions are relatively general. As shown in the “Applications” section, A3 includes many specific types of assumptions presented in recent articles, such as the works of Alary, Gollier, and Treich (), Berger (), and Osaki and Schlesinger ().…”

“…We say that a DM is ambiguity prudent if and only if . There have been several definitions of ambiguity prudence in the literature, for example, Berger () and Gierlinger and Gollier (), who define ambiguity prudence in terms of the DAAA property.…”

“…Adopting KMM's (2009) standard time preferences, under condition (iv) (i.e., DAAA), the existing relevant works, for example, Alary, Gollier, and Treich (), Berger (), Osaki and Schlesinger (), find the ambiguity‐averse DM can exert more precautionary saving or effort than an ambiguity‐neutral one in the presence of ambiguity but do not show the effects of changes in the degree of ambiguity aversion on precautionary saving or effort . Compared with the previous works, Proposition 1 uses Hayashi and Miao's () nonstandard time preferences in a general intertemporal decision model to show that a more ambiguity‐averse DM always exerts more current paying as long as conditions (i), (iii), and (iv) hold.…”

“…Berger () considers the following two‐period model for prevention. In the first period, wealth is assured with a value of .…”

“…Self‐insurance means that the effort of a DM reduces the size of a loss, whereas prevention means that the effort of a DM reduces the probability of a loss. Our work is related to the literature on the effects of ambiguity on self‐insurance and self‐protection decisions (see, among others, Snow, ; Martinez‐Correa, ; Alary, Gollier, and Treich, ; Berger, ; Gollier, ).…”