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Optimal dividend strategies with time-inconsistent preferences

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  • Chen, Shumin
  • Li, Zhongfei
  • Zeng, Yan

Abstract

This paper studies the optimal dividend strategies of an insurance company when the manager has time-inconsistent preferences. We consider the problem for a naive manager and a sophisticated manager, and analytically derive the optimal dividend strategies when claim sizes follow an exponential distribution. Our results show that the manager with time-inconsistent preferences tends to pay out dividends earlier than her time-consistent counterpart and that the sophisticated manager is more inclined to pay out dividends than the naive manager. Furthermore, we extend these results to the case with claim sizes following a mixed exponential distribution, and provide a numerical analysis to reveal the sensitivity of the optimal dividend strategies to changes in the premium, claims and surplus volatility.

Suggested Citation

  • Chen, Shumin & Li, Zhongfei & Zeng, Yan, 2014. "Optimal dividend strategies with time-inconsistent preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 150-172.
    • Handle: RePEc:eee:dyncon:v:46:y:2014:i:c:p:150-172
    DOI: 10.1016/j.jedc.2014.06.018
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal dividend strategy; Time preference; Hyperbolic discounting rate; Time-inconsistent; Insurance company;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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