Dynamic Endogenous Risk and Social Accounting

Abstract

Investments to reduce risk against personal or natural hazards have been explored through static models that have not addressed inter-temporal considerations and the presence of multiple risks. We extend the endogenous risk literature—self-protection and self-insurance against risky events—into a dynamic setting and relate our findings to the social accounting literature. In addition, we derive implications for behavior when people are faced with multiple risks. The findings suggest how the nature of the risks surrounding the person helps determine the time path and extent of efforts over any particular risk. The results also point out the limitations of existing willingness to pay estimates based upon static optimization models.

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