scholarly journals Optimal insurance under rank-dependent utility and incentive compatibility

2018 ◽  
Vol 29 (2) ◽  
pp. 659-692 ◽  
Author(s):  
Zuo Quan Xu ◽  
Xun Yu Zhou ◽  
Sheng Chao Zhuang
Keyword(s):  
Incentive Compatibility ◽  
Optimal Insurance ◽  
Rank Dependent Utility

MEAN–VARIANCE INSURANCE DESIGN WITH COUNTERPARTY RISK AND INCENTIVE COMPATIBILITY

2021 ◽  
pp. 1-23
Author(s):  
Tim J. Boonen ◽  
Wenjun Jiang
Keyword(s):  
Compatibility Condition ◽  
Default Risk ◽  
Incentive Compatibility ◽  
Limited Liability ◽  
Counterparty Risk ◽  
Optimal Insurance ◽  
Ex Post ◽  
Function Formulation ◽  
The Mean ◽  
Mean Variance

Abstract This paper studies the optimal insurance design from the perspective of an insured when there is possibility for the insurer to default on its promised indemnity. Default of the insurer leads to limited liability, and the promised indemnity is only partially recovered in case of a default. To alleviate the potential ex post moral hazard, an incentive compatibility condition is added to restrict the permissible indemnity function. Assuming that the premium is determined as a function of the expected coverage and under the mean–variance preference of the insured, we derive the explicit structure of the optimal indemnity function through the marginal indemnity function formulation of the problem. It is shown that the optimal indemnity function depends on the first and second order expectations of the random recovery rate conditioned on the realized insurable loss. The methodology and results in this article complement the literature regarding the optimal insurance subject to the default risk and provide new insights on problems of similar types.

Book Reviews

2016 ◽  
Vol 54 (2) ◽  
pp. 589-591
Keyword(s):  
Graduate Students ◽  
Mechanism Design ◽  
Incentive Compatibility ◽  
Dominant Strategy ◽  
University Of Michigan ◽  
Dynamic Mechanism Design ◽  
Temple University ◽  
The University ◽  
Robust Mechanism Design

Dimitrios Diamantaras of Temple University reviews “An Introduction to the Theory of Mechanism Design,” by Tilman Börgers. The Econlit abstract of this book begins: “Presents explanations of classic results in the theory of mechanism design and examines the frontiers of research in mechanism design in a text written for advanced undergraduate and graduate students of economics who have a good understanding of game theory. Discusses screening; examples of Bayesian mechanism design; examples of dominant strategy mechanisms; incentive compatibility; Bayesian mechanism design; dominant strategy mechanisms; nontransferable utility; informational interdependence; robust mechanism design; and dynamic mechanism design. Börgers is Samuel Zell Professor of the Economics of Risk at the University of Michigan.”

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