Working Paper BETA #2010-08

Download working-paper

Title : The impact of ambiguity on health prevention and insurance.

Author(s) : Johanna Etner, Sandrine Spaeter

Abstract : In this paper, we analyze the choice of primary prevention made by individuals who bear a risk of being in bad health and an additive risk (of complications) that occurs after a disease has been diagnosed. By considering a two argument utility (depending on wealth and health), we show that the presence of a well-known (no ambiguity) additive risk of complications induces more investment in primary prevention by a risk-averse agent only if her preferences does not display some cross prudence in wealth (u122 < 0). If there is some ambiguity on the e¤ective probability of complication, an increase in ambiguity aversion increases prevention if the agent is a correlation lover (u12 > 0). We also show that full (partial) insurance can be optimal even if insurance premia are loaded (fair). These results hold with and without prevention and the individuals attitudes toward correlation help explain the impact of ambiguity on the optimal individual decisions.

Key-words : health; utility; ambiguity; prevention; insurance.

JEL Classification : D81; I19.