A Note on Deductible Insurance and Production

Yaffa Machnes and Kit Pong Wong
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Yaffa Machnes: Graduate School of Business Administration, Bar Ilan University, Ramat Gan 52900, Israel, e-mail: machny@mail.biu.ac.il
Kit Pong Wong: School of Economics and Finance, University of Hong Kong, Pokfulam Road, Hong Kong, People's Republic of China, e-mail: kpwong@econ.hku.hk

The Geneva Risk and Insurance Review, 2003, vol. 28, issue 1, 73-80

Abstract: This paper examines the optimal production decision of a firm facing revenue risk. We show that the purchase of actuarially fair deductible insurance unambiguously induces the firm to produce more if the firm is not only risk averse but also prudent. If the firm's perferences satisfy constant absolute risk aversion, buying actuarially unfair deductible insurance unambiguously enhances production should the positive loading factor be sufficiently small. When there are moral hazard problems in that the firm's output cannot be contracted upon, we show that the purchase of actuarially fair deductible insurance unambiguously induces the firm to produce more if the firm's utility function is quadratic. The Geneva Papers on Risk and Insurance Theory (2003) 28, 73–80. doi:10.1023/A:1022147932059

Date: 2003
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