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<p>We study the effect of prudence on optimal prevention in two periods with Kreps and Porteus (<CitationRef CitationID="CR39">1978</CitationRef>) and Selden (<CitationRef CitationID="CR53">1978</CitationRef>) (KPS) preferences. We use consumption smoothing as the benchmark and consider risk-averse decision-makers. In this framework, prudence has a positive effect on prevention, generalizing findings of Menegatti (<CitationRef CitationID="CR42">2009</CitationRef>). We extend this result to risk lovers and comparative risk aversion. When saving is endogenized, the preference over the timing of uncertainty resolution becomes irrelevant for prevention, and only the curvature of marginal utility matters. This result allows us to identify a class of decision-makers who are prudent in the KPS model but whose prevention effort coincides with that of a risk-neutral agent. Our findings highlight that the structure of intertemporal preferences critically shapes the link between prudence and prevention.</p>

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Disentangling risk and time for optimal prevention

  • 期刊论文

  • 出版模式：

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  • 发表日期：

    2026年5月27日

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  • Yichun Chi,
  • Richard Peter,
  • Mengjia Qi

摘要

We study the effect of prudence on optimal prevention in two periods with Kreps and Porteus (1978) and Selden (1978) (KPS) preferences. We use consumption smoothing as the benchmark and consider risk-averse decision-makers. In this framework, prudence has a positive effect on prevention, generalizing findings of Menegatti (2009). We extend this result to risk lovers and comparative risk aversion. When saving is endogenized, the preference over the timing of uncertainty resolution becomes irrelevant for prevention, and only the curvature of marginal utility matters. This result allows us to identify a class of decision-makers who are prudent in the KPS model but whose prevention effort coincides with that of a risk-neutral agent. Our findings highlight that the structure of intertemporal preferences critically shapes the link between prudence and prevention.