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The Theory of Risk-Bearing: Small and Great Risks

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  • Arrow, Kenneth J

Abstract

Under certain conditions, risk-sharing and, in particular, insurance are mutually advantageous transactions. An ideal competitive market for risk-shifting is described; the payments received by individuals depend on the resolution of all the uncertainties at the time of the market, including, for example, damages to all parties, not just to the insured. In an ideal system, premiums depend only on the total damage in a given state, not on its distribution over individuals. In particular, mitigation measures are optimally induced. The differences between the ideal model of insurance and the real world are described, and some explanations offered. Copyright 1996 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 12 (1996)
Issue (Month): 2-3 (May)
Pages: 103-11

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Handle: RePEc:kap:jrisku:v:12:y:1996:i:2-3:p:103-11

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Web page: http://www.springerlink.com/link.asp?id=100299

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Cited by:
  1. Andrés Solimano, 2003. "Prevention and Insurance of Conflict and Terrorism: Issues and Evidence for Latin America," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 40(121), pages 617-625.
  2. Ozlem Ozdemir & Andrea Morone, 2014. "An experimental investigation of insurance decisions in low probability and high loss risk situations," Journal of Economic Interaction and Coordination, Springer, vol. 9(1), pages 53-67, April.
  3. Geoffroy Enjolras & Robert Kast, 2008. "Using participating and financial contracts to insure catastrophe risk: Implications for crop risk management," Working Papers 08-01, LAMETA, Universtiy of Montpellier, revised Jan 2008.
  4. Liu, Dan & Tsegai, Daniel W., 2011. "The New Cooperative Medical Scheme (NCMS) and its implications for access to health care and medical expenditure: Evidence from rural China," Discussion Papers 116746, University of Bonn, Center for Development Research (ZEF).
  5. Michael R. Powers & Martin Shubik, 1999. "Toward a Theory of Reinsurance and Retrocession," Cowles Foundation Discussion Papers 1227, Cowles Foundation for Research in Economics, Yale University.
  6. Levinson, David & Parthasarathi, Pavithra Kandadai, 2001. "Evaluation Methods for Measuring the Value of ITS Services and Benefits from Implementation: Part X Freeway Service Patrols," Institute of Transportation Studies, Research Reports, Working Papers, Proceedings qt8nj1t4bg, Institute of Transportation Studies, UC Berkeley.
  7. Skees, Jerry R., 2000. "A role for capital markets in natural disasters: a piece of the food security puzzle," Food Policy, Elsevier, vol. 25(3), pages 365-378, June.

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