An Increase in Background Risk and Demand for Loss Reduction

This paper extends the research about the impact of an increase in background risk from cases with one decision variable to those with two decision variables. We apply the results of Eeckhoudt and Kimball (1992) to examine the comparative statics of an increase in background risk on demand for loss reduction that depends on market insurance and self-insurance together. We find that individuals with decreasing absolute risk aversion and decreasing absolute prudence demand more loss reduction in the face of an increase in background risk, although they may not demand more market insurance or self-insurance. [