TITLE
"An Increase in Background Risk and Demand for Loss Reduction,"
Journal of Insurance Issues,
Larry Y. Tzeng and Jen-Hung Wang, Fall 2002, Vol. 25, No. 2, pp.
127-141. Entire article in
Acrobat format.
ABSTRACT
This paper extends the research about the impact of an increase in background
risk from cases with one decision variable to those with two decision
variables. We apply the results of Eeckhoudt and Kimball (1992) to examine
the comparative statics of an increase in background risk on demand for loss
reduction that depends on market insurance and self-insurance together. We
find that individuals with decreasing absolute risk aversion and decreasing
absolute prudence demand more loss reduction in the face of an increase in
background risk, although they may not demand more market insurance or
self-insurance.
[Keywords: background risk, market insurance, self-insurance, loss reduction,
absolute prudence]
|