Budget-constrained optimal insurance without the nonnegativity constraint on indemnities
Insurance: Mathematics and Economics, 2019, vol. 84, issue C, 22-39
In a problem of Pareto-efficient insurance contracting (bilateral risk sharing) with expected-utility preferences, Gollier (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.
Keywords: Optimal insurance; Deductible contract; Nonnegativity constraint; Ambiguity; Knightian uncertainty; Non-additive probability; Probability distortion; Choquet integral (search for similar items in EconPapers)
JEL-codes: C02 D86 G22 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:84:y:2019:i:c:p:22-39
Access Statistics for this article
Insurance: Mathematics and Economics is currently edited by R. Kaas, Hansjoerg Albrecher, M. J. Goovaerts and E. S. W. Shiu
More articles in Insurance: Mathematics and Economics from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().