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Author: Publisher: ISBN: Category : Languages : en Pages :
Book Description
This paper examines qualitative properties of efficient insurance contracts in the presence of background risk. In order to get results for all strictly risk-averse expected utility maximizers, the concept of "stochastic increasingness" is used. Different assumptions on the stochastic dependence between the insurable and uninsurable risk lead to different qualitative properties of the efficient contracts. The new results obtained under hypotheses of dependent risks are compared to classical results in the absence of background risk or to the case of independent risks. The theory is further generalized to nonexpected utility maximizers.
Author: Publisher: ISBN: Category : Languages : en Pages :
Book Description
This paper examines qualitative properties of efficient insurance contracts in the presence of background risk. In order to get results for all strictly risk-averse expected utility maximizers, the concept of "stochastic increasingness" is used. Different assumptions on the stochastic dependence between the insurable and uninsurable risk lead to different qualitative properties of the efficient contracts. The new results obtained under hypotheses of dependent risks are compared to classical results in the absence of background risk or to the case of independent risks. The theory is further generalized to nonexpected utility maximizers.
Author: Patrick Bolton Publisher: ISBN: Category : Economics Languages : en Pages : 57
Book Description
We study a dynamic-contracting problem involving risk sharing between two parties - the Proposer and the Responder - who invest in a risky asset until an exogenous but random termination time. In any time period they must invest all their wealth in the risky asset, but they can share the underlying investment and termination risk. When the project ends they consume their final accumulated wealth. The Proposer and the Responder have constant relative risk aversion R and r respectively, with R>r>0. We show that the optimal contract has three components: a non-contingent flow payment, a share in investment risk and a termination payment. We derive approximations for the optimal share in investment risk and the optimal termination payment, and we use numerical simulations to show that these approximations offer a close fit to the exact rules. The approximations take the form of a myopic benchmark plus a dynamic correction. In the case of the approximation for the optimal share in investment risk, the myopic benchmark is simply the classical formula for optimal risk sharing. This benchmark is endogenous because it depends on the wealths of the two parties. The dynamic correction is driven by counterparty risk. If both parties are fairly risk tolerant, in the sense that 2>R>r, then the Proposer takes on more risk than she would under the myopic benchmark. If both parties are fairly risk averse, in the sense that R>r>2, then the Proposer takes on less risk than she would under the myopic benchmark. In the mixed case, in which R>2>r, the Proposer takes on more risk when the Responder's share in total wealth is low and less risk when the Responder's share in total wealth is high. In the case of the approximation for the optimal termination payment, the myopic benchmark is zero. The dynamic correction tells us, among other things, that: (i) if the asset has a high return then, following termination, the Responder compensates the Proposer for the loss of a valuable investment opportunity; and (ii) if the asset has a low return then, prior to termination, the Responder compensates the Proposer for the low returns obtained. Finally, we exploit our representation of the optimal contract to derive simple and easily interpretable sufficient conditions for the existence of an optimal contract -- National Bureau of Economic Research web site.
Author: Elyes Jouini Publisher: ISBN: Category : Languages : en Pages : 28
Book Description
We consider the problem of optimal risk sharing of some given total risk between two economic agents characterized by law-invariant monetary utility functions or equivalently, law-invariant risk measures. We first prove existence of an optimal risk sharing allocation which is in addition increasing in terms of the total risk. We next provide an explicit characterization in the case where both agents' utility functions are comonotone. The general form of the optimal contracts turns out to be given by a sum of options (stop-loss contracts, in the language of insurance) on the total risk. In order to show the robustness of this type of contracts to more general utility functions, we introduce a new notion of strict risk aversion conditionally on lower tail events, which is typically satisfied by the semi-deviation and the entropic risk measures. Then, in the context of an AV@R-agent facing an agent with strict monotone preferences and exhibiting strict risk aversion conditional on lower tail events, we prove that optimal contracts again are European options on the total risk.
Author: Georges Dionne Publisher: Springer Science & Business Media ISBN: 0792392043 Category : Business & Economics Languages : en Pages : 748
Book Description
Economic and financial research on insurance markets has undergone dramatic growth since its infancy in the early 1960s. Our main objective in compiling this volume was to achieve a wider dissemination of key papers in this literature. Their significance is highlighted in the introduction, which surveys major areas in insurance economics. While it was not possible to provide comprehensive coverage of insurance economics in this book, these readings provide an essential foundation to those who desire to conduct research and teach in the field. In particular, we hope that this compilation and our introduction will be useful to graduate students and to researchers in economics, finance, and insurance. Our criteria for selecting articles included significance, representativeness, pedagogical value, and our desire to include theoretical and empirical work. While the focus of the applied papers is on property-liability insurance, they illustrate issues, concepts, and methods that are applicable in many areas of insurance. The S. S. Huebner Foundation for Insurance Education at the University of Pennsylvania's Wharton School made this book possible by financing publication costs. We are grateful for this assistance and to J. David Cummins, Executive Director of the Foundation, for his efforts and helpful advice on the contents. We also wish to thank all of the authors and editors who provided permission to reprint articles and our respective institutions for technical and financial support.
Author: Louis Eeckhoudt Publisher: ISBN: Category : Self-Help Languages : en Pages : 376
Book Description
"The fundamental topic of choice thory- how do economic agents decide when faces with a situalion of risk- and its accompanying theoretical models are here dissected and analyzed. Using a textbook style, the authors present the microfoundations of risk, uncertainty and its management with specific application to insurance and finance. The book analyzes the formal evalustion of risky situations, analyzes individual decisions under uncertainty and determines the markets for risk, including market incompleteness and risk transfer and welfar..."
Author: Zhaneta K. Tancheva Publisher: ISBN: Category : Languages : en Pages : 42
Book Description
I examine the role of the experimentally documented bias time-inconsistency for the dynamics of asset prices and wealth distribution between agents with recursive preferences. In a general equilibrium model with two types of investors, time-consistent and time-inconsistent, I show that the wealth share of the time-inconsistent agent is strictly lower than the one of the time-consistent agent, all else equal. The time-inconsistent investor, however, can dominate in the long-run despite her bias, in case she incorrectly believes that in the future she will save more than the time-consistent investor. In the presence of long-run risk accounting for time-inconsistency allows to study and endogenously match asset pricing dynamics such as the countercyclical feature of the equity premium that we observe in reality. These dynamics stem from the fact that the time-inconsistent investor who is less averse to persistent shocks tends to sell insurance against them to the time-consistent agent.
Author: Gary Charness Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
This paper presents the first laboratory study of risk-sharing without commitment. Our experiment captures the main features of a simple model of voluntary insurance between two agents. In the model, two individuals interact over a potential infinite horizon and suffer random income shocks. Risk-averse individuals have incentives to smooth consumption by making transfers to each other. These transfers being voluntary, only self-enforcing risk-sharing arrangements are possible: transfers can never be so large as to tempt individuals to renege on them. This constraint, when binding, has strong implications for the shape of the constrained optimal risk-sharing arrangement. In our experiment, participants are matched in pairs. Each period, one of them, randomly drawn, receives a given amount h in addition to its regular income. After observing both incomes, each person in a pair chooses a non-negative transfer to make to the other person. Two features of the experimental design are crucial. First, it is common information that all pairs will be dissolved at the end of each period with a given probability. Participants are informed when this occurs and randomly re-matched. This replicates the effect of infinite-horizon and discounting in the model. Second, at the end of the experiment, a unique period is randomly drawn to count for cash payment. This feature is essential to isolate for the utility outcome of each period. We find evidence generally consistent with risk sharing, with higher transfers coming from individuals who received h in the period. Moreover, in support of the theory, transfers are much higher with a higher continuation probability and they also are highly correlated with the individual's degree of risk aversion. However, while the model predicts an increase in transfers with ex ante inequality, we observe the opposite effect. This may reflect considerations of identity or group membership.
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Author: Patrick Bolton
Author: Elyes Jouini
Author: Georges Dionne
Author: Knut K. Aase
Author: Douglas Gale
Author: 
Author: Louis Eeckhoudt
Author: Zhaneta K. Tancheva
Author: Gary Charness