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The impact of ambiguity on health prevention and insurance

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  • Johanna Etner
  • Sandrine Spaeter

Abstract

In this paper, we analyze the choice of primary prevention made by individuals who bear a risk of being in bad health and an additive risk (of complications) that occurs after a disease has been diagnosed. By considering a two argument utility (depending on wealth and health), we show that the presence of a well-known (no ambiguity) additive risk of complications induces more investment in primary prevention by a risk-averse agent only if her preferences does not display some cross prudence in wealth (u122 0). We also show that full (partial) insurance can be optimal even if insurance premia are loaded (fair). These results hold with and without prevention and the individuals attitudes toward correlation help explain the impact of ambiguity on the optimal individual decisions.

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Bibliographic Info

Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2010-08.

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Date of creation: 2010
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Handle: RePEc:ulp:sbbeta:2010-08

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Keywords: health; utility; ambiguity; prevention; insurance.;

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References

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  1. BLEICHRODT, Han & CRAINICH, David & EECKHOUDT, Louis, . "The effect of comorbidities on treatment decisions," CORE Discussion Papers RP -1668, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Christophe Courbage & Béatrice Rey, 2006. "Prudence and optimal prevention for health risks," Health Economics, John Wiley & Sons, Ltd., vol. 15(12), pages 1323-1327.
  3. Sandrine Spaeter & Patrick Roger, 1997. "The Design of Optimal Insurance Contracts: A Topological Approach," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 22(1), pages 5-19, June.
  4. Gollier, Christian & Schlesinger, Harris, 1996. "Arrow's Theorem on the Optimality of Deductibles: A Stochastic Dominance Approach," Economic Theory, Springer, Springer, vol. 7(2), pages 359-63, February.
  5. Thibault Gajdos & Takashi Hayashi & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2006. "Attitude toward imprecise information," Cahiers de la Maison des Sciences Economiques, Université Panthéon-Sorbonne (Paris 1) v06081, Université Panthéon-Sorbonne (Paris 1).
  6. Louis Eeckhoudt & Christian Gollier, 2005. "The impact of prudence on optimal prevention," Economic Theory, Springer, Springer, vol. 26(4), pages 989-994, November.
  7. Louis Eeckhoudt & Béatrice Rey & Harris Schlesinger, 2007. "A Good Sign for Multivariate Risk Taking," Management Science, INFORMS, INFORMS, vol. 53(1), pages 117-124, January.
  8. Sujoy Mukerji & Peter Klibanoff, 2002. "A Smooth Model of Decision,Making Under Ambiguity," Economics Series Working Papers 113, University of Oxford, Department of Economics.
  9. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  10. Viscusi, W Kip & Evans, William N, 1990. "Utility Functions That Depend on Health Status: Estimates and Economic Implications," American Economic Review, American Economic Association, American Economic Association, vol. 80(3), pages 353-74, June.
  11. Doherty, Neil A & Eeckhoudt, Louis, 1995. "Optimal Insurance without Expected Utility: The Dual Theory and the Linearity of Insurance Contracts," Journal of Risk and Uncertainty, Springer, Springer, vol. 10(2), pages 157-79, March.
  12. Valentino Dardanoni & Alan Wagstaff, 1987. "Uncertainty and the demand for medical care," Working Papers, Centre for Health Economics, University of York 028chedp, Centre for Health Economics, University of York.
  13. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, American Economic Association, vol. 69(1), pages 84-96, March.
  14. Evans, William N & Viscusi, W Kip, 1991. "Estimation of State-Dependent Utility Functions Using Survey Data," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 94-104, February.
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Cited by:
  1. Meixing Dai, 2010. "External constraint and financial crises with balance sheet effects," Working Papers of BETA 2010-23, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  2. Anwar, Sajid & Zheng, Mingli, 2012. "Competitive insurance market in the presence of ambiguity," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 79-84.

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