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Journal of Risk and Uncertainty

, Volume 38, Issue 2, pp 159–172 | Cite as

Conditional payments and self-protection

  • Liqun LiuEmail author
  • Andrew J. Rettenmaier
  • Thomas R. Saving
Article

Abstract

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.

Keywords

Conditional payment Contingent fee Self protection Insurance Risk aversion 

JEL Classification

D61 D81 

Notes

Acknowledgements

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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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  • Liqun Liu
    • 1
    Email author
  • Andrew J. Rettenmaier
    • 1
  • Thomas R. Saving
    • 1
  1. 1.Private Enterprise Research CenterTexas A&M UniversityCollege StationUSA

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