Precautionary paying for stochastic improvements under background risks

Hongxia WANG, Jianli WANG*, Jingyuan LI, Xinping XIA

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

9 Citations (Scopus)

Abstract

In a two-dimensional framework, we propose a general two-period decision model which extends the temporal precautionary saving and effort model. We relate the role of cross-prudence to the impact of background risks on paying for stochastic improvements of the future risk. We find that the effect of background risks introduced in the first period is consistent to signing cross derivatives of bivariate utility functions, which is independent of the type of stochastic improvements brought by additional paying; however, when the background risk occurs in the second period, that is not the case.
Original languageEnglish
Pages (from-to)180-185
Number of pages6
JournalInsurance : Mathematics and Economics
Volume64
Early online date3 Jun 2015
DOIs
Publication statusPublished - Sept 2015

Bibliographical note

We are grateful to an editor and two anonymous referees for their helpful comments.

Funding

This work is supported by the National Natural Science Foundation of China with grant numbers 71401074, 71461009, the Fundamental Research Funds for the Central Universities under Research Project No. NR2014002, the Faculty Research Grant of Lingnan University under Research Project No. DR12A9, and Direct Grant for Research of Lingnan University under Research Project No. DR13C8.

Keywords

  • Background risk
  • Cross-prudence
  • Precautionary effort
  • Precautionary saving
  • Stochastic improvements

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