Risk management activities of a non-industrial private forest owner with a bivariate utility function

Marielle Brunette () and Stéphane Couture

No 2014-01, Working Papers - Cahiers du LEF from Laboratoire d'Economie Forestiere, AgroParisTech-INRA

Abstract: In this paper, we propose to analyse the choice of risk management activity made by a non-industrial private forest owner who derives utility from consumption and from the sentimental value of the forest that bears a risk of disaster. We consider a bivariate utility function depending on consumption and sentimental value of forest. In this context, we analyse insurance and/or self-insurance decisions. We show that, under fair premium, full insurance is optimal only if the cross derivative of the utility function equals zero. Under-insurance and over-insurance may also be optimal depending on the sign of this cross derivative. We also show that, under a positive loading factor, optimal partial insurance is validated only if the cross derivative is positive; otherwise full insurance may be optimal even with a loading insurance. We also observe that risk aversion increases the level of insurance demand and selfinsurance activity, extending this standard result obtained with an univariate utility function to a bivariate utility function. Moreover, when the forest owner can simultaneously insure and invest in self-insurance activity, full insurance is never optimal if the cross derivative is positive. Finally, we prove that insurance and selfinsurance may be substitutes, and if preferences are separable and exhibit decreasing absolute risk aversion, then insurance and self-insurance are always considered as substitutes.

Keywords: Forest management; insurance; self-insurance; bivariate utility; risk. (search for similar items in EconPapers)
JEL-codes: D81 Q23 Q26 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2014-01, Revised 2014-01
New Economics Papers: this item is included in nep-agr, nep-env, nep-ias, nep-rmg and nep-upt
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Downloads: (external link)
http://www6.nancy.inra.fr/lef/Cahiers-du-LEF/2014/2014-01 First version, 2010

Related works:
Journal Article: Risk management activities of a non-industrial privateforest owner with a bivariate utility function (2018)
Journal Article: Risk management activities of a non-industrial privateforest owner with a bivariate utility function (2018)
Journal Article: Risk management activities of a non-industrial private forest owner with a bivariate utility function (2018)
Working Paper: Risk management activities of a non-industrial private forest owner with a bivariate utility function (2018)
Working Paper: Risk management activities of a non-industrial private forest owner with a bivariate utility function (2014)
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