Optimal insurance design of ambiguous risks
AbstractWe examine the characteristics of the optimal insurance contract under linear transaction cost and an ambiguous distribution of losses. Under the standard expected utility model, we know from Arrow (1965) that it contains a straight deductible. In this paper, we assume that the policyholder is ambiguity-averse in the sense of Klibanoff, Marinacci and Mukerji (2005). The optimal contract depends upon the structure of the ambiguity. For example, if the set of possible priors can be ranked according to the monotone likelihood ratio order, the optimal contract contains a disappearing deductible. We also show that the policyholder’s ambiguity aversion can reduce the optimal insurance coverage.
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Bibliographic InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 718.
Date of creation: May 2012
Date of revision: Jan 2013
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Other versions of this item:
- Gollier, Christian, 2012. "Optimal insurance design of ambiguous risks," TSE Working Papers 12-303, Toulouse School of Economics (TSE), revised Jan 2013.
- Gollier, Christian, 2012. "Optimal insurance design of ambiguous risks," LERNA Working Papers 12.18.375, LERNA, University of Toulouse, revised Jan 2013.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-08 (All new papers)
- NEP-IAS-2012-05-08 (Insurance Economics)
- NEP-MIC-2012-05-08 (Microeconomics)
- NEP-UPT-2012-05-08 (Utility Models & Prospect Theory)
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- Huang, Rachel J. & Huang, Yi-Chieh & Tzeng, Larry Y., 2013. "Insurance bargaining under ambiguity," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 812-820.
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