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Disappointment and the Optimal Insurance Contract

  • Rachel J Huang

    ()

    (Graduate Institute of Finance, National Taiwan University of Science and Technology, Taipei, Taiwan.
    Risk and Insurance Research Center (RIRC), National Cheng-Chi University, Taipei, Taiwan.)

  • Pai-Ta Shih

    (Department of Finance, National Taiwan University, Taipei, Taiwan. E-mails: ptshih@management.ntu.edu.tw; tzeng@ntu.edu.tw)

  • Larry Y Tzeng

    (1] Department of Finance, National Taiwan University, Taipei, Taiwan. E-mails: ptshih@management.ntu.edu.tw; tzeng@ntu.edu.tw[2] Risk and Insurance Research Center (RIRC), National Cheng-Chi University, Taipei, Taiwan.)

This paper studies the optimal insurance contract under disappointment theory. We show that, when the individuals anticipate disappointment, there are two types of optimal insurance contract. The first type contains a deductible and a coinsurance above the deductible. We find that zero marginal cost is just a sufficient but not a necessary condition for a zero deductible. The second type has no deductible and the optimal insurance starts with full coverage for small losses and includes a coinsurance above an upper value of the full coverage.

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Article provided by Palgrave Macmillan & International Association for the Study of Insurance Economics (The Geneva Association) in its journal The Geneva Risk and Insurance Review.

Volume (Year): 37 (2012)
Issue (Month): 2 (September)
Pages: 258-284

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Handle: RePEc:pal:genrir:v:37:y:2012:i:2:p:258-284
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