A Diamond-Stiglitz approach to the demand for self-protection
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The existing research concerning the relationship between risk aversion and prudence and the demand for self-protection assumes that the loss variable follows a Bernoulli distribution, and that changes in the level of self-protection are mean preserving. The analysis here replaces these two very strong conditions with ones which are more general. When doing this, the method of analysis is also significantly modified. This modification includes representing a change in the level of self-protection using the procedure developed by Diamond and Stiglitz (Journal of Economic Theory 8:337-360, 1974) for representing a change in risk. This alternate representation allows the existing findings to be generalized considerably, and also simplifies the analysis.
KeywordsSelf protection Prevention Risk aversion Prudence Decreasing risk aversion
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