On Correlation Aversion and Insurance Demand

Christos Giannikos, Andreas Kakolyris () and Tin Shan (Michael) Suen
Additional contact information
Andreas Kakolyris: College of Business and Public Management, Kean University, 1000 Morris Avenue, Union, NJ 07083, USA
Tin Shan (Michael) Suen: College of Business and Public Management, Kean University, 1000 Morris Avenue, Union, NJ 07083, USA

JRFM, 2024, vol. 17, issue 4, 1-9

Abstract: This is a study of decision problems under two-dimensional risk. We use an existing index of absolute correlation aversion to conveniently classify bivariate preferences, with respect to attitudes toward this risk. This classification seems to be more important than whether decision makers are correlation-averse or correlation-seeking for the study of insurance demand when a loss has a multidimensional impact. On this note, we also re-examine Mossin’s theorem under bivariate preferences, where full insurance is preferred with a fair premium, while less than full coverage is preferred with a proportional premium loading. Furthermore, based on the comparative statics of this two-dimensional insurance model for changes in correlation aversion, we derive testable implications about the classification of bivariate utility functions. For the particular case when the two-dimensional risk can be interpreted as risk on income and health, we identify the form of separable utility functions depending on health status and income that is consistent with household disability insurance decisions.

Keywords: correlation aversion; disability insurance; health; decision making under uncertainty; two-dimensional risk; tradeoffs between income and health (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/1911-8074/17/4/136/pdf (application/pdf)
https://www.mdpi.com/1911-8074/17/4/136/ (text/html)

Related works:
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:gam:jjrfmx:v:17:y:2024:i:4:p:136-:d:1362378

Access Statistics for this article

JRFM is currently edited by Ms. Chelthy Cheng

More articles in JRFM from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().