On multivariate prudence

On multivariate prudence

In this paper we extend the theory of precautionary saving to the case in which uncertainty is multidimensional and we develop a matrix-measure of multivariate prudence. Furthermore, we characterize comparative prudence, decreasing and increasing prudence, the e¤ect of uncertainty on the marginal propensity to consume out of wealth, and the Drèze-Modigliani substitution e¤ect in this multivaria...

Prudence with Multiplicative Risk

Prudence in bargaining: The effect of uncertainty on bargaining outcomes

We investigate the outcome of bargaining when a player’s pay-off from agreement is risky. We find that a risk-averse player typically increases his equilibrium receipts when his pay-off is made risky. This is because the presence of risk makes individuals behave “more patiently” in bargaining. Strong analogies are drawn to the precautionary saving literature. We show that the effect of risk on ...

The impact of prudence on optimal prevention revisited

This paper re-examines the link between absolute prudence and self-protection activities. We show that the level of effort chosen by an agent with positive and decreasing absolute prudence is larger than the optimal effort chosen by a risk-neutral agent if the degree of absolute prudence is less than a threshold that is utilityindependent and empirically verifiable. We explain this threshold by...

Prudence with respect to ambiguity

Under expected utility, prudence is equivalent to a positive third derivative of utility and plays a crucial role in precautionary saving behaviour. Eeckhoudt and Schlesinger (2006) proposed behavioural de nitions of prudence and of higher order risk preferences. The present paper proposes a similar de nition for prudence with respect to ambiguity, i.e., situations in which objective probabilit...