Prevention and Precaution

Abstract

This chapter surveys the economic literature on prevention and precaution. Prevention refers to costly activities that mitigate risk. Prevention encompasses self-protection, an investment to reduce the probability of loss, and self-insurance, an investment to reduce the severity of loss. Precaution is defined as an activity to alleviate potential harm in response to limited present information, which may become more complete over time. We first present results on prevention, including the effect of risk preferences, wealth, and background risk. We also summarize recent behavioral research on prevention. Second, we discuss how the concept of precaution can be linked to the effect of arrival of information and present the literature on precautionary effort.

Reference

Christophe Courbage, Richard Peter, Béatrice Rey, and Nicolas Treich, “Prevention and Precaution”, in Handbook of Insurance, Georges Dionne (ed.), 3ème edition, Springer Cham, 2025.