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Optimal Risk-Sharing and Deductables in Insurance

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Author Info
Aase, Knut K. () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
Abstract

Risk-sharing in insurance is analyzed, with a view towards explaining the prevalence of deductibles. First we introduce, in a modern setting, the main concepts of the theory of risk-sharing in a group of agents. This theory we apply to the risk-sharing problem between an insurer and an insurance customer. We motivate the development through simple examples, illustrating some of the subtle points of this theory. In order to deduce deductibles endogenously, not explained in the neoclassical model, we separately introduce (i) the insurable asset as a decision variable, (ii) administrative costs, and (iii) moral hazard, and illustrate by examples.

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Publisher Info
Paper provided by Department of Finance and Management Science, Norwegian School of Economics and Business Administration in its series Discussion Papers with number 2006/24.

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Length: 13 pages
Date of creation: 29 Dec 2006
Date of revision:
Handle: RePEc:hhs:nhhfms:2006_024

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Postal: NHH, Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
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Web page: http://www.nhh.no/for/
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Related research
Keywords: Reinsurance Exchange; Equilibrium; Pareto Optimality; Representative Agent; Core Solution; Individual Rationality; Deductibles; Costs; Moral Hazard;

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Find related papers by JEL classification:
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  2. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September. [Downloadable!] (restricted)
  3. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
  4. Bewley, Truman F., 1972. "Existence of equilibria in economies with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 4(3), pages 514-540, June. [Downloadable!] (restricted)
  5. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April. [Downloadable!] (restricted)
  6. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March. [Downloadable!] (restricted)
  7. Aase, Knut K., 2007. "Wealth Effects on Demand for Insurance," Discussion Papers 2007/6, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
  8. Knut K. Aase, 1992. "Dynamic Equilibrium and the Structure of Premiums in a Reinsurance Market," The Geneva Risk and Insurance Review, Palgrave Macmillan Journals, vol. 17(2), pages 93-136, December. [Downloadable!] (restricted)
  9. Mas-Colell, Andreu, 1986. "The Price Equilibrium Existence Problem in Topological Vector Lattice s," Econometrica, Econometric Society, vol. 54(5), pages 1039-53, September. [Downloadable!] (restricted)
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