Firm’s protection against disasters: are investment and insurance substitutes or complements?

Giuseppe Attanasi, Laura Concina, Caroline Kamaté and Valentina Rotondi
Additional contact information
Laura Concina: FONCSI
Caroline Kamaté: FONCSI

Theory and Decision, 2020, vol. 88, issue 1, No 7, 151 pages

Abstract: Abstract We use a controlled laboratory experiment to study firm’s protection against potential technological damages. The probability of a catastrophic event is known, and the firm’s costly investment in safety reduces it. The firm can also buy an insurance with full or partial refund against the consequences of the catastrophic event, which ultimately reduces the variance of the firm’s investment-in-safety lottery. The firm makes these two choices simultaneously, after observing the insurance contract proposed by an insurer who chooses this contract within a set of premium–deductible combinations. We parametrize the insurer–firm game such that (i) a risk-neutral insurer maximizes his expected profit by offering an actuarially fair contract with full insurance; (ii) a risk-neutral firm is indifferent between investing in safety and accepting a fair insurance contract. We aim at understanding whether investment in safety and insurance are substitutes or complements in the firm’s risk management of catastrophic events. In line with our predictions, the experimental results suggest that they are substitutes rather than complements: the firm’s investment in safety measures is affected by the insurer’s proposed contract, the latter usually involving only partial insurance.

Keywords: Decision under risk; Losses; Small probabilities; Probability reduction; Technological disasters; Insurance; Deductible (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://link.springer.com/10.1007/s11238-019-09703-w Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Firm's protection against disasters: are investment and insurance substitutes or complements? (2020)
Working Paper: Firm's Protection against Disasters: Are Investment and Insurance Substitutes or Complements? (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:theord:v:88:y:2020:i:1:d:10.1007_s11238-019-09703-w

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/11238/PS2

DOI: 10.1007/s11238-019-09703-w

Access Statistics for this article

Theory and Decision is currently edited by Mohammed Abdellaoui

More articles in Theory and Decision from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().