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Insurance demand and first-order risk increases under (μ,σ)-preferences revisited

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  • Eichner, Thomas
  • Wagener, Andreas

Abstract

In the mean–variance framework, insurance demand goes down when the expected size of insurable losses decreases or insurance premia increase if the elasticity of risk aversion with respect to expected wealth exceeds -1. In terms of the expected-utility approach, this condition is equivalent to the index of partial relative risk aversion being lower than one.

Suggested Citation

  • Eichner, Thomas & Wagener, Andreas, 2014. "Insurance demand and first-order risk increases under (μ,σ)-preferences revisited," Finance Research Letters, Elsevier, vol. 11(4), pages 326-331.
  • Handle: RePEc:eee:finlet:v:11:y:2014:i:4:p:326-331
    DOI: 10.1016/j.frl.2014.06.003
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    References listed on IDEAS

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    1. Georges Dionne & Christian Gollier, 1992. "Comparative Statics Under Multiple Sources of Risk with Applications to Insurance Demand," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 17(1), pages 21-33, June.
    2. Ormiston, Michael B & Schlee, Edward E, 2001. "Mean-Variance Preferences and Investor Behaviour," Economic Journal, Royal Economic Society, vol. 111(474), pages 849-861, October.
    3. Hadar, Josef & Seo, Tae Kun, 1990. "The Effects of Shifts in a Return Distribution on Optimal Portfolios," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 721-736, August.
    4. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-430, June.
    5. Jack Meyer, 1992. "Beneficial Changes in Random Variables Under Multiple Sources of Risk and Their Comparative Statics*," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 17(1), pages 7-19, June.
    6. L. Eeckhoudt & C. Gollier & H. Schlesinger, 2005. "Economic and financial decisions under risk," Post-Print hal-00325882, HAL.
    7. Bonilla, Claudio A. & Ruiz, Jose L., 2014. "Insurance demand and first order risk increases under (μ,σ)-preferences," Finance Research Letters, Elsevier, vol. 11(3), pages 219-223.
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    Citations

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    Cited by:

    1. Huang, Baoan & Miao, Jianjun & Zhang, Zongliang & Zhao, Dianbo, 2016. "Some new results about optimal insurance demand under uncertainty," Finance Research Letters, Elsevier, vol. 17(C), pages 280-284.
    2. Broll, Udo & Guo, Xu & Welzel, Peter & Wong, Wing-Keung, 2015. "The banking firm and risk taking in a two-moment decision model," Economic Modelling, Elsevier, vol. 50(C), pages 275-280.
    3. repec:eee:ecmode:v:64:y:2017:i:c:p:69-73 is not listed on IDEAS
    4. Udo Broll & Soumyatanu Mukherjee, 2016. "International trade and risk aversion elasticities," Discussion Papers 2016-17, University of Nottingham, GEP.
    5. Guo, Xu & Wagener, Andreas & Wong, Wing-Keung & Zhu, Lixing, 2017. "The Two-Moment Decision Model with Additive Risks," MPRA Paper 77625, University Library of Munich, Germany.

    More about this item

    Keywords

    Mean–variance preferences; Insurance demand; Relative risk aversion; Elasticity of risk aversion;

    JEL classification:

    • 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
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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