This chapter surveys the economic literature on prevention and precaution. Prevention refers as either a self-protection activity – i.e. a reduction in the probability of a loss – or a self-insurance activity – i.e. a reduction of the loss –. Precaution is defined as a prudent and temporary activity when the risk is imperfectly known. We first present results on prevention, including the effect of risk preferences, wealth and background risks. Second, we discuss how the concept of precaution is strongly linked to the effect of arrival of information over time in sequential models as well as to situations in which there is ambiguity over probability distributions.
TSE Working Paper, n. 13-445, October 2013