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A Note on Partial Insurance and the Arrow-Pratt Measure of Risk Aversion

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  • W. Henry Chiu

    (School of Economic Studies, The University of Manchester, Manchester, M13 9PL, UK, e-mail: henry.chiu@man.ac.uk)

Abstract

Pratt [1964] establishes that a more risk-averse individual in the Arrow-Pratt sense has a higher compensating risk premium for full insurance, but no comparable result has been established for partial insurance. Ross [1981] shows that a more risk-averse individual in the Arrow-Pratt sense may not be willing to pay more for a reduction in risk in the sense of mean-preserving contraction. We show that a more risk-averse individual in the Arrow-Pratt sense has a higher compensating risk premium for all empirically relevant forms of partial insurance because they induce a reduction in risk in the stronger sense of Bickel and Lemann [1979]. The Geneva Risk and Insurance Review (2005) 30, 35–40. doi:10.1007/s10836-005-1106-3

Suggested Citation

  • W. Henry Chiu, 2005. "A Note on Partial Insurance and the Arrow-Pratt Measure of Risk Aversion," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 30(1), pages 35-40, June.
  • Handle: RePEc:pal:genrir:v:30:y:2005:i:1:p:35-40
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