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Optimal insurance design of ambiguous risks

Christian Gollier ()

No 12.18.375, LERNA Working Papers from LERNA, University of Toulouse

Abstract: We examine the characteristics of the optimal insurance contract under linear transaction cost and an ambiguous distribution of losses. Under the standard expected utility model, we know from Arrow (1965) that it contains a straight deductible. In this paper, we assume that the policyholder is ambiguity-averse in the sense of Klibanoff, Marinacci and Mukerji (2005). The optimal contract depends upon the structure of the ambiguity. For example, if the set of possible priors can be ranked according to the monotone likelihood ratio order, the optimal contract contains a disappearing deductible. We also show that the policyholder’s ambiguity aversion can reduce the optimal insurance coverage.

JEL-codes: D81 G22 (search for similar items in EconPapers)
Date: 2012-05, Revised 2013-01
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Related works:
Journal Article: Optimal insurance design of ambiguous risks (2014) Downloads
Working Paper: Optimal insurance design of ambiguous risks (2013) Downloads
Working Paper: Optimal insurance design of ambiguous risks (2013) Downloads
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