Arbitration between insurance and self-insurance against natural risks

Arbitrage entre assurance et auto-assurance contre les risques naturels

Guibril Zerbo ()
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Guibril Zerbo: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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Abstract: This article studies the effect of preferences on an individual's optimal choice between insurance demand and self-insurance in a risk context and then in an ambiguous context. The innovative idea in this paper is to introduce ambiguity about the effectiveness of self-insurance to understand the nature of the relationship between insurance demand and self-insurance demand. We show that an increase in risk aversion increases the demand for insurance and decreases the demand for self-insurance. However, when risk is introduced on the effectiveness of self-insurance, we show that the individual still prefers self-insurance to market insurance. We also show that when ambiguity is introduced on the efficacy of self-insurance, the individual always prefers market insurance to self-insurance. Finally, we determine the conditions under which the individual's self-insurance effort is higher or lower under ambiguity than risk.

Keywords: Natural risks; arbitration; insurance; self-insurance; efficacy; risk; ambiguity (search for similar items in EconPapers)
Date: 2024
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