Abstract
Promoting prevention is an important goal of public policy. Fifty years ago, Ehrlich and Becker (J Polit Econ 80:623–648, 1972) proposed a simple model of prevention (or self-protection as they called it). Surprisingly enough, subsequent research, mainly within the expected utility paradigm, showed that it is hard to derive clear predictions within this simple model that can help to guide policy. This is what I refer to as the prevention puzzle: why is it so hard for economic theory to guide prevention decisions? In this article I try to shed light on this question. I review the existing literature and add some tentative new results under nonexpected utility. While the impact of risk aversion on prevention is complex, three factors seem to contribute unambiguously to underprevention: prudence, likelihood insensitivity, and loss aversion. I conclude by giving some ideas how empirical research may contribute to the understanding of prevention decisions and help to solve the prevention puzzle.
| Original language | English |
|---|---|
| Pages (from-to) | 277-297 |
| Number of pages | 21 |
| Journal | GENEVA Risk and Insurance Review |
| Volume | 47 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - Sept 2022 |
Bibliographical note
Funding Information:Aurélien Baillon, Iván Paya, Richard Peter, Béatrice Rey, and the editors Alexander Mürmann and Casey G. Rothschild, gave very helpful comments on previous versions of this paper.
Publisher Copyright:
© 2022, International Association for the Study of Insurance Economics.