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Expected utility and catastrophic consumption risk

Masako Ikefuji, Roger Laeven, Jan Magnus (jan@janmagnus.nl) and Chris Muris

Insurance: Mathematics and Economics, 2015, vol. 64, issue C, 306-312

Abstract: An expected utility based cost-benefit analysis is, in general, fragile to distributional assumptions. We derive necessary and sufficient conditions on the utility function of consumption in the expected utility model to avoid this. The conditions ensure that expected (marginal) utility of consumption and the expected intertemporal marginal rate of substitution that trades off consumption and self-insurance remain finite, also under heavy-tailed distributional assumptions. Our results are relevant to various fields encountering catastrophic consumption risk in cost-benefit analysis.

Keywords: Expected utility; Catastrophe; Consumption; Cost-benefit analysis; Risk management and self-insurance; Power utility; Exponential utility; Heavy tails (search for similar items in EconPapers)
JEL-codes: D61 D81 G10 G20 Q5 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:64:y:2015:i:c:p:306-312

DOI: 10.1016/j.insmatheco.2015.06.007

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