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Uncertainty aversion in a simple insurance model

  • Fredrik Andersson

    (Department of Economics, Lund University, Sweden)

A simple insurance model is considered where the distribution of accident probabilities in the population is known, but where the actual probability of each policyholder is unknown to both insurers and the policyholder himself. It is shown that if policyholders are uncertainty averse, deductibles are distorted downwards. A complete view of insurance in such circumstances need thus consider trade in uncertainty as well as risk.

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Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

Volume (Year): 12 (1999)
Issue (Month): 1 (Spring)
Pages: 16-27

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Handle: RePEc:fep:journl:v:12:y:1999:i:1:p:16-27
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  1. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc.
  2. Geanakoplos & Adam Brandenburger & Eddie Dekel, 1988. "Correlated Equilibrium with Generalized Information Structures," Cowles Foundation Discussion Papers 884R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1989.
  3. Hendon, Ebbe, et al, 1994. "Expected Utility with Lower Probabilities," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 197-216, March.
  4. Hogarth, Robin M & Kunreuther, Howard, 1989. " Risk, Ambiguity, and Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 5-35, April.
  5. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
  6. Fredrik Andersson, 2001. "Adverse selection and bilateral asymmetric information," Journal of Economics, Springer, vol. 74(2), pages 173-195, June.
  7. Segal, Uzi & Spivak, Avia, 1990. "First order versus second order risk aversion," Journal of Economic Theory, Elsevier, vol. 51(1), pages 111-125, June.
  8. repec:tpr:qjecon:v:90:y:1976:i:4:p:630-49 is not listed on IDEAS
  9. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January.
  10. Karni, Edi & Schmeidler, David, 1991. "Utility theory with uncertainty," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 33, pages 1763-1831 Elsevier.
  11. Friedman, Bernard, 1974. "Risk Aversion and the Consumer Choice of Health Insurance Option," The Review of Economics and Statistics, MIT Press, vol. 56(2), pages 209-14, May.
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