The market value of preventive activities: A contingent-claims approach

We use a contingent-claims approach to determine the market value of preventive investments. We show that the lower the initial probability of accident, the greater is the market value of a reduction in this probability. Besides, at initially low probabilities, ceteris paribus, the market gives a higher value to a reduction in accident probability when aggregate (correlated) catastrophic risks rather than independent ones are involved. The reverse occurs at initially high probabilities.