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Expected utility and catastrophic consumption risk

Author

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  • Ikefuji, Masako
  • Laeven, Roger J.A.
  • Magnus, Jan R.
  • Muris, Chris

Abstract

An expected utility based cost-benefit analysis is, in general, fragile to distributional assumptions. We derive necessary and sufficient conditions on the utility function of consumption in the expected utility model to avoid this. The conditions ensure that expected (marginal) utility of consumption and the expected intertemporal marginal rate of substitution that trades off consumption and self-insurance remain finite, also under heavy-tailed distributional assumptions. Our results are relevant to various fields encountering catastrophic consumption risk in cost-benefit analysis.

Suggested Citation

  • Ikefuji, Masako & Laeven, Roger J.A. & Magnus, Jan R. & Muris, Chris, 2015. "Expected utility and catastrophic consumption risk," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 306-312.
  • Handle: RePEc:eee:insuma:v:64:y:2015:i:c:p:306-312
    DOI: 10.1016/j.insmatheco.2015.06.007
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    References listed on IDEAS

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    Cited by:

    1. Alexis Louaas & Pierre Picard, 2019. "Optimal nuclear liability insurance," Working Papers hal-01996648, HAL.
    2. Alexis Louaas & Pierre Picard, 2014. "Optimal Insurance For Catastrophic Risk: Theory And Application To Nuclear Corporate Liability," Working Papers hal-01097897, HAL.
    3. Clark, Beth & Stewart, Gavin B. & Panzone, Luca A. & Kyriazakis, Ilias & Frewer, Lynn J., 2017. "Citizens, consumers and farm animal welfare: A meta-analysis of willingness-to-pay studies," Food Policy, Elsevier, vol. 68(C), pages 112-127.
    4. repec:eee:ecolec:v:142:y:2017:i:c:p:249-256 is not listed on IDEAS

    More about this item

    Keywords

    Expected utility; Catastrophe; Consumption; Cost-benefit analysis; Risk management and self-insurance; Power utility; Exponential utility; Heavy tails;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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