Journal article
Budget-constrained optimal insurance without the nonnegativity constraint on indemnities
Insurance, mathematics & economics, Vol.84, pp.22-39
01/01/2019
DOI: 10.1016/j.insmatheco.2018.10.004
Abstract
In a problem of Pareto-efficient insurance contracting (bilateral risk sharing) with expected-utility preferences, Collier (1987) relaxes the nonnegativity constraint on indemnities and argues that the existence of a deductible is only due to the variability in the cost of insurance, not the nonnegativity constraint itself. In this paper, we find support for a similar statement in problems of budget-constrained optimal insurance (i.e., demand for insurance). Specifically, we consider a setting of ambiguity (unilateral and bilateral) and a setting of belief heterogeneity. We drop the nonnegativity constraint and assume no cost (or a fixed cost) to the insurer, and we derive closed-form solutions to the problems that we formulate. In particular, we show that optimal indemnities no longer include a deductible provision; and they can be negative for small values of the loss, or in case of no loss. (C) 2018 Elsevier B.V. All rights reserved.
Details
- Title: Subtitle
- Budget-constrained optimal insurance without the nonnegativity constraint on indemnities
- Creators
- Mario Ghossoub - University of Waterloo
- Resource Type
- Journal article
- Publication Details
- Insurance, mathematics & economics, Vol.84, pp.22-39
- DOI
- 10.1016/j.insmatheco.2018.10.004
- ISSN
- 0167-6687
- eISSN
- 1873-5959
- Publisher
- Elsevier
- Number of pages
- 18
- Grant note
- 2018-03961 / Natural Sciences and Engineering Research Council of Canada (NSERC)
- Language
- English
- Date published
- 01/01/2019
- Academic Unit
- Statistics and Actuarial Science
- Record Identifier
- 9985179849302771
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