Endogenous risk and protection premiums |
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Authors: | Jason Shogren |
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Institution: | (1) Department of Economics, Iowa State University, 50011 Ames, Iowa, USA |
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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 efficiency(x) =-p(x)/p(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. |
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Keywords: | endogenous risk protection premiums risk attitudes |
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