This paper analyzes optimal prevention expenditures in a situation of multiple correlated risks. We focus on probability reduction (self-protection). This renders correlation endogenous so that we measure dependence as the relative deviation of the probability of joint losses from the uncorrelated case. If prevention concerns only one risk, introducing a negatively correlated exogenous risk increases the level of prevention expenditures. If prevention expenditures may be invested for both risks, a substitution effect arises due to the competition for resources. Under decreasing returns on self-protection we find that increased dependence increases overall prevention expenditures, but not necessarily prevention expenditures for each risk due to differences in prevention efficiency. Similar results are found when considering the impact of more severe losses. We derive policy implications from our results.
