Cross‐Prudence and Optimal Prevention

Jingyuan LI; Richard PETER; Lin ZHOU

doi:10.1111/iere.70092

Cross‐Prudence and Optimal Prevention

Jingyuan LI
, Richard PETER^*
, Lin ZHOU

^*Corresponding author for this work

Research output: Journal Publications › Journal Article (refereed) › peer-review

Abstract

In this paper, we study optimal prevention in the presence of a correlated nonfinancial background risk. Under positive correlation, cross-prudence in the nonfinancial attribute reduces optimal prevention. We establish this result in the most direct extension of the standard prevention problem with binary marginal distributions and show that it extends to richer settings. Our analysis highlights a broader implication: in economically relevant cases with loss probabilities below one-half and positive correlation, cross-prudence emerges as an additional force that discourages prevention. As a result, optimal prevention can fall below the expected-cost minimizing level, even when agents are risk-averse.

Original language	English
Journal	International Economic Review
DOIs	https://doi.org/10.1111/iere.70092
Publication status	E-pub ahead of print - 24 Jul 2026

Bibliographical note

We thank Shiqi Chen, Andreas Dambaur (discussant), Glenn Harrison (discussant), James Huang, Jean-Gabriel Lauzier, Liqun Liu, Ingmar Nolte, Manh Pham, and Petra Steinorth for helpful comments and suggestions. We also thank seminar participants in the Department of Accounting and Finance at Lancaster University, at the 2024 EGRIE Seminar in Hamburg, and at the 2025 World Risk and Insurance Economics Congress in Calgary for their feedback. We are particularly grateful to the three anonymous reviewers and the coeditor, Masaki Aoyagi, for their constructive comments, which led to significant improvements in the exposition and interpretation of the results. All remaining errors are our own.

Publisher Copyright:
© 2026 The Author(s). International Economic Review published by Wiley Periodicals LLC on behalf of the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Keywords

bivariate risk
correlation
cross-prudence
prevention
self-protection

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10.1111/iere.70092Licence: CC BY

https://onlinelibrary.wiley.com/doi/10.1111/iere.70092

Cite this

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title = "Cross‐Prudence and Optimal Prevention",

abstract = "In this paper, we study optimal prevention in the presence of a correlated nonfinancial background risk. Under positive correlation, cross-prudence in the nonfinancial attribute reduces optimal prevention. We establish this result in the most direct extension of the standard prevention problem with binary marginal distributions and show that it extends to richer settings. Our analysis highlights a broader implication: in economically relevant cases with loss probabilities below one-half and positive correlation, cross-prudence emerges as an additional force that discourages prevention. As a result, optimal prevention can fall below the expected-cost minimizing level, even when agents are risk-averse.",

keywords = "bivariate risk, correlation, cross-prudence, prevention, self-protection",

author = "Jingyuan LI and Richard PETER and Lin ZHOU",

note = "We thank Shiqi Chen, Andreas Dambaur (discussant), Glenn Harrison (discussant), James Huang, Jean-Gabriel Lauzier, Liqun Liu, Ingmar Nolte, Manh Pham, and Petra Steinorth for helpful comments and suggestions. We also thank seminar participants in the Department of Accounting and Finance at Lancaster University, at the 2024 EGRIE Seminar in Hamburg, and at the 2025 World Risk and Insurance Economics Congress in Calgary for their feedback. We are particularly grateful to the three anonymous reviewers and the coeditor, Masaki Aoyagi, for their constructive comments, which led to significant improvements in the exposition and interpretation of the results. All remaining errors are our own. Publisher Copyright: {\textcopyright} 2026 The Author(s). International Economic Review published by Wiley Periodicals LLC on behalf of the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.",

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doi = "10.1111/iere.70092",

language = "English",

journal = "International Economic Review",

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AU - LI, Jingyuan

AU - PETER, Richard

AU - ZHOU, Lin

N1 - We thank Shiqi Chen, Andreas Dambaur (discussant), Glenn Harrison (discussant), James Huang, Jean-Gabriel Lauzier, Liqun Liu, Ingmar Nolte, Manh Pham, and Petra Steinorth for helpful comments and suggestions. We also thank seminar participants in the Department of Accounting and Finance at Lancaster University, at the 2024 EGRIE Seminar in Hamburg, and at the 2025 World Risk and Insurance Economics Congress in Calgary for their feedback. We are particularly grateful to the three anonymous reviewers and the coeditor, Masaki Aoyagi, for their constructive comments, which led to significant improvements in the exposition and interpretation of the results. All remaining errors are our own. Publisher Copyright: © 2026 The Author(s). International Economic Review published by Wiley Periodicals LLC on behalf of the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

PY - 2026/7/24

Y1 - 2026/7/24

N2 - In this paper, we study optimal prevention in the presence of a correlated nonfinancial background risk. Under positive correlation, cross-prudence in the nonfinancial attribute reduces optimal prevention. We establish this result in the most direct extension of the standard prevention problem with binary marginal distributions and show that it extends to richer settings. Our analysis highlights a broader implication: in economically relevant cases with loss probabilities below one-half and positive correlation, cross-prudence emerges as an additional force that discourages prevention. As a result, optimal prevention can fall below the expected-cost minimizing level, even when agents are risk-averse.

AB - In this paper, we study optimal prevention in the presence of a correlated nonfinancial background risk. Under positive correlation, cross-prudence in the nonfinancial attribute reduces optimal prevention. We establish this result in the most direct extension of the standard prevention problem with binary marginal distributions and show that it extends to richer settings. Our analysis highlights a broader implication: in economically relevant cases with loss probabilities below one-half and positive correlation, cross-prudence emerges as an additional force that discourages prevention. As a result, optimal prevention can fall below the expected-cost minimizing level, even when agents are risk-averse.

KW - bivariate risk

KW - correlation

KW - cross-prudence

KW - prevention

KW - self-protection

UR - https://www.scopus.com/pages/publications/105045544393

U2 - 10.1111/iere.70092

DO - 10.1111/iere.70092

M3 - Journal Article (refereed)

SN - 0020-6598

JO - International Economic Review

JF - International Economic Review

ER -

Cross‐Prudence and Optimal Prevention

Abstract

Bibliographical note

Keywords

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