Optimal Insurance with Rank-Dependent Utility and Increasing Indemnities

Xu Zuo Quan, Zhou Xun Yu and Zhuang Sheng Chao

Papers from arXiv.org

Abstract: Bernard et al. (2015) study an optimal insurance design problem where an individual's preference is of the rank-dependent utility (RDU) type, and show that in general an optimal contract covers both large and small losses. However, their contracts suffer from a problem of moral hazard for paying more compensation for a smaller loss. This paper addresses this setback by exogenously imposing the constraint that both the indemnity function and the insured's retention function be increasing with respect to the loss. We characterize the optimal solutions via calculus of variations, and then apply the result to obtain explicitly expressed contracts for problems with Yaari's dual criterion and general RDU. Finally, we use a numerical example to compare the results between ours and that of Bernard et al. (2015).

Date: 2015-09
New Economics Papers: this item is included in nep-ias and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Mathematical Finance, Vol.29 (2019), 659-692

Downloads: (external link)
http://arxiv.org/pdf/1509.04839 Latest version (application/pdf)

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:arx:papers:1509.04839

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().