Optimal prevention and other risks in a two-period model

In this paper, we look at how the presence of other risks modifies the optimal level of prevention to protect against one risk. We carry out our analysis in a two-period framework and use various configurations of other risks defined either in the first or second period, as state-independent or state-dependent. We show that results differ depending on both the nature of the other risks and the properties of the utility function.

► We examine the impact of background risks on the optimal level of prevention. ► First period background risk reduces prevention under prudence in this period. ► Second period background risk increases prevention under prudence in this period. ► Risk aversion only drives the results for state-dependent background risks. ► Increasing background risk effects depend on the signs of higher derivatives.