Impact of background risk on self-insurance against health loss

• Main Author: Piotr Dudziński
• Format: Article
• Language: English
• Published: University of Gdansk 2013-12-01
• Series: Contemporary Economy
• Subjects: self-insurance; background risk; risk-aversion
• Online Access: http://www.wspolczesnagospodarka.pl/?p=674

This paper introduces two-period model for optimal self-insurance against health loss in the future in the case when there are two independent sources of risk, one of them is non-insurable. We prove that the impact of introduction of background risk on self- insurance depends on the timing. If background risk is contemporaneous with decision- making then it reduces demand for self-insurance; if background risk concerns the future then it increases demand for self-insurance. The result depends on signs of the third partial derivatives of the bivariate utility function. We also provide economic interpretation of the result.