OPTIMAL INSURANCE DESIGN UNDER RANK-DEPENDENT EXPECTED UTILITY

2013 ◽  
Vol 25 (1) ◽  
pp. 154-186 ◽  
Author(s):  
Carole Bernard ◽  
Xuedong He ◽  
Jia-An Yan ◽  
Xun Yu Zhou
Keyword(s):  
Expected Utility ◽  
Optimal Insurance ◽  
Rank Dependent Expected Utility

scholarly journals The Optimal Insurance Policy for the General Fixed Cost of Handling an Indemnity under Rank-Dependent Expected Utility

2015 ◽  
Vol 2015 ◽  
pp. 1-18 ◽  
Author(s):  
Liurui Deng
Keyword(s):  
Moral Hazard ◽  
Cost Function ◽  
Adverse Selection ◽  
Expected Utility ◽  
Optimal Solution ◽  
Linear Functions ◽  
Fixed Cost ◽  
Optimal Insurance ◽  
Initial Wealth ◽  
Rank Dependent Expected Utility

Based on Bernard et al.’s research, we focus on the Pareto optimal insurance design with the insured’s Rank-Dependent Expected Utility (RDEU). Compared with their previous work, our novelties are the more general fixed cost function of the insurer and the discussion of adverse selection and moral hazard. In particular, Bernard et al. only consider the case in which the fixed cost function of handling an indemnity is the linear function. However, the fixed cost function is not just linear functions in real insurance market. So, we explore the more general fixed cost function including both the linear and nonlinear functions. On the other hand, we consider adverse selection and moral hazard which are involved by Bernard et al. Leading adverse selection and moral hazard into our research makes our results more practical and meaningful. Moreover, we provide an insight into the sensitivity of an optimal solution for the insured’s initial wealth and the parameters related to the fixed cost function of handling an indemnity. We further compare the two different utility functions of the insured in terms of influence of optimal policy analysis.

scholarly journals Optimal Insurance under Maxmin Expected Utility

2020 ◽  
Author(s):  
Corina Birghila ◽  
Tim J. Boonen ◽  
Mario Ghossoub
Keyword(s):  
Expected Utility ◽  
Maxmin Expected Utility ◽  
Optimal Insurance

scholarly journals Measuring Ex Ante Welfare in Insurance Markets

2020 ◽  
Author(s):  
Nathaniel Hendren
Keyword(s):  
Willingness To Pay ◽  
Expected Utility ◽  
Low Income ◽  
Reduced Form ◽  
Cost Curve ◽  
Optimal Insurance ◽  
Percentage Difference ◽  
Ex Ante ◽  
Information Sets ◽  
Market Surplus

Abstract The willingness to pay for insurance captures the value of insurance against only the risk that remains when choices are observed. This article develops tools to measure the ex ante expected utility impact of insurance subsidies and mandates when choices are observed after some insurable information is revealed. The approach retains the transparency of using reduced-form willingness to pay and cost curves, but it adds one additional sufficient statistic: the percentage difference in marginal utilities between insured and uninsured. I provide an approach to estimate this additional statistic that uses only the reduced-form willingness to pay curve, combined with a measure of risk aversion. I compare the approach to structural approaches that require fully specifying the choice environment and information sets of individuals. I apply the approach using existing willingness to pay and cost curve estimates from the low-income health insurance exchange in Massachusetts. Ex ante optimal insurance prices are roughly 30% lower than prices that maximize observed market surplus. While mandates reduce market surplus, the results suggest they would actually increase ex ante expected utility.

BETTING MARKET: Rank Dependent Expected Utility

2013 ◽  
Vol 1 (2) ◽  
pp. 147-163
Author(s):  
Loreto Llorente
Keyword(s):  
Decision Theory ◽  
Expected Utility ◽  
Utility Maximization ◽  
Betting Market ◽  
Expected Utility Maximization ◽  
Classical Decision ◽  
Rank Dependent Expected Utility ◽  
The Way

In Pelota matches, games with two mutually exclusive and exhaustive outcomes, bets on the winner are made through a middleman who receives 16% of the finally paid amount. The classical decision theory of expected utility maximization can not explain this market assuming bettors are identical. Llorente and Aizpurua (2007) explain the existence of bets in the market under Quiggin’s rank dependent expected utility (RDEU) model. They find that bettors have to be optimistic in order to explain the existence of a bet. Analyzing the way odds are fixed in the market Llorente (2006) finds that assuming equal return on bets there are inefficiencies in the market. In this paper we show that, given an assumption that bettors are rank dependent expected utility maximizers, these inefficiencies tend to disappear.

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