Optimal Design of Model-Contingent Insurance Contracts

Frank Riedel and Marco Spengemann
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Frank Riedel: Center for Mathematical Economics, Bielefeld University
Marco Spengemann: Center for Mathematical Economics, Bielefeld University

No 767, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University

Abstract: We study optimal insurance design under linear transaction costs for a policyholder with smooth ambiguity preferences when the underlying loss distribution is identifiable ex post. Under expected utility, Arrow’s classical theorem implies that the optimal contract is a straight deductible. Under ambiguity, this result generally fails. We show that ex post identifiability restores the straight-deductible structure: the optimal contract consists of model-contingent straight deductibles. We also derive comparative statics with respect to transaction costs and characterize the ordering of deductibles under stochastic ordering of loss distributions.

Keywords: Insurance design; risk sharing; smooth ambiguity aversion; identifiability; straight deductible; comparative statics (search for similar items in EconPapers)
Pages: 29
Date: 2026-07-22
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