Optimal Insurance without Expected Utility: The Dual Theory and the Linearity of Insurance Contracts
Models of the insurance markets and institutions are routinely based on expected utility. Since EU is being challenged by an increasing number of decision models, we examine whether EU-based models are robust in their predictions. To do so, we rework some basic models of optimal insurance contracts and equilibrium using the "dual" theory to EU of Yaari. When there is a single, insurable source of risk, dual theory permits only corner solutions if the contract itself is linear. This contrasts sharply with EU. Nonlinearity, and thereby the possibility of interior solutions, is introduced in two ways. First, the contract itself is nonlinear, i.e., a deductible insurance policy. Or second, the decision maker is subject to some background risk such as uninsurable risky assets or default of the insurer. When decision problems are subject to nonlinearity, the predictions on optimal insurance are more similar to, though not identical with, those generated with EU. Copyright 1995 by Kluwer Academic Publishers
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Volume (Year): 10 (1995)
Issue (Month): 2 (March)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/economic+theory/journal/11166/PS2|
When requesting a correction, please mention this item's handle: RePEc:kap:jrisku:v:10:y:1995:i:2:p:157-79. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.