Conditional payments and self-protection
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Self-protection can be financed either by upfront payments or by conditional payments (or contingent fees) in which individuals pay a provider only when a favorable outcome is realized. We find that, from the vantage point of a risk-averse individual, conditional payments welfare dominate upfront payments in the state-independent framework, but upfront payments welfare dominate conditional payments in the state-dependent framework. Moreover, more risk aversion always implies more self-protection under conditional payments, for both state-independent and state-dependent frameworks. In contrast, it has been previously argued that more risk aversion does not necessarily imply more self-protection under upfront payments.
KeywordsConditional payment Contingent fee Self protection Insurance Risk aversion
JEL ClassificationD61 D81
The authors want to thank Louis Eeckhoudt, Bruno Jullien, W. Kip Viscusi and a referee for very helpful comments and suggestions. Excellent research assistance from Amy Hopson is also greatly appreciated. All remaining errors are our own.
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