Insuring a risky investment project
In the standard model for insurance demand, the risk is totally exogenous and the insurance premium is paid for out of riskless wealth. This model yields results that are mostly in contradiction to everyday observation and have been used to question the pertinence of expected utility theory on which the model is based. For some years now, several papers have made attempts to provide foundations for a theory of insurance demand leading to less provocative comparative statics results. In these papers, the risk for which coverage is sought becomes endogenous and the decision to purchase insurance is made simultaneously with the decision how much to invest in insurable assets. All these papers use a standard financial investment framework. This paper offers a contribution to this literature by using a slightly different framework: the case of a firm exposed to an insurable risk affecting return on a real investment project. The model is kept simple by using a two-state environment. It yields results that are both more complete and more general than results in previous work with the same motivation.
|Date of creation:||Oct 2006|
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- Briys, E. & Dionne, G. & Eeckhoudt, L., 1988. "More on Insurance As a Giffen Good," Cahiers de recherche 8813, Universite de Montreal, Departement de sciences economiques.
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- Hoy, Michael & Robson, Arthur J., 1981. "Insurance as a Giffen good," Economics Letters, Elsevier, vol. 8(1), pages 47-51.
- Eeckhoudt, Louis & Meyer, Jack & Ormiston, Michael B, 1997. "The Interaction between the Demands for Insurance and Insurable Assets," Journal of Risk and Uncertainty, Springer, vol. 14(1), pages 25-39, January.
- Mayers, David & Smith, Clifford W, Jr, 1982. "On the Corporate Demand for Insurance," The Journal of Business, University of Chicago Press, vol. 55(2), pages 281-296, April. Full references (including those not matched with items on IDEAS)
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