Risk management activities of a non-industrial private forest owner with a bivariate utility function

Marielle Brunette () and Stéphane Couture

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Abstract: In this paper, we propose to analyse the choice of risk management activity made by a nonindustrial private forest owner who derives utility from consumption and from the sentimental value of the forest that bears a risk of disaster. We consider a bivariate utility function depending on consumption and sentimental value of forest. In this context, we analyse insurance and/or self-insurance decisions. We show that, under fair premium, full insurance is optimal only if the cross derivative of the utility function equals zero. Under-insurance and over-insurance may also be optimal depending on the sign of this cross derivative. We also show that, under a positive loading factor, optimal partial insurance is validated only if the cross derivative is positive; otherwise full insurance may be optimal even with a loading insurance. We also observe that risk aversion increases the level of insurance demand and self-insurance activity, extending this standard result obtained with an univariate utility function to a bivariate utility function. Moreover, when the forest owner can simultaneously insure and invest in self-insurance activity, full insurance is never optimal if the cross derivative is positive. Finally, we prove that insurance and self-insurance may be substitutes, and if preferences are separable and exhibit decreasing absolute risk aversion, then insurance and self-insurance are always considered as substitutes.

Keywords: Forest management; Insurance; Self-insurance; Bivariate utility; risk (search for similar items in EconPapers)
Date: 2014-06-12
Note: View the original document on HAL open archive server: https://hal.science/hal-01072301v1
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Published in Journées internationales du Risque, Jun 2014, Niort, France. 19 p

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Journal Article: Risk management activities of a non-industrial privateforest owner with a bivariate utility function (2018)
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Journal Article: Risk management activities of a non-industrial private forest owner with a bivariate utility function (2018)
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Working Paper: Risk management activities of a non-industrial private forest owner with a bivariate utility function (2014)
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