Conditional payments and self-protection

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.