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Endogenous risk and protection premiums
Authors:Jason Shogren
Institution:(1) Department of Economics, Iowa State University, 50011 Ames, Iowa, USA
Abstract:Endogenous risk implies an individual perceives he can influence the likelihood that a state of nature will occur. To add structure to endogenous risk models, I define a protection premium for reduced uncertainty about protection efficiency when a stochastic variable enters the probability functionp(x) rather than the utility function. For a binary lottery, a measure of aversion of uncertain protection efficiencyGamma(x) =-pPrime(x)/pprime(x) is defined to unambiguously determine the effects of increased risk on an individual's voluntary contribution to public good supply earmarked to reduce the probability of an undesirable state. Finally, I examine the protection premium in ann-state discrete lottery and when uncertainty exists in both the probability and utility function.
Keywords:endogenous risk  protection premiums  risk attitudes
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