Event Details

Finance seminar

Abstract

In this paper, we study optimal prevention in the presence of a correlated non-financial background risk. Under positive correlation, cross-prudence in the non-financial attribute lowers optimal prevention. We show our main result in the most direct extension of the standard prevention problem with binary marginal distributions. We also discuss some model extensions including non-financial risks with several states, bounds on the intensity of cross-prudence. Our main take-away is that cross-prudence emerges as an important factor that can help explain low levels of prevention at the individual level.