Optimal decision of dynamic wealth allocation with life insurance for mitigating health risk under market incompleteness

Chang-Chih Chen, Chia-Chien Chang, Edward W. Sun and Min-Teh Yu ()

European Journal of Operational Research, 2022, vol. 300, issue 2, 727-742

Abstract: This research proposes a dynamic control modeling of income allocation between life insurance purchase and consumption subject to market incompleteness. We adopt a no-good-deal specification of the multiplicity of stochastic discount factors, and treat death as a stopping time on the individual’s health status. Health status non-tradability renders death risk non-hedgeable and the life insurance market incomplete. The no-good-deal condition provides useful guidance for individuals to choose the insurance-income ratio inside good-deal bounds. The magnitude of the influence of market incompleteness on life insurance demand (measured as the width of good-deal bounds) displays life-cycle patterns that converge over time and are highly sensitive to health status characteristics.

Keywords: Finance; Decision analysis; Investment analysis; OR in health services; Risk analysis (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:300:y:2022:i:2:p:727-742

DOI: 10.1016/j.ejor.2021.10.016

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