Pricing Dynamic Insurance Risks Using the Principle of Equivalent Utility

We introduce an expected utility approach to price insurance risks in a dynamic financial market setting. The valuation method is based on comparing the maximal expected utility functions with and without incorporating the insurance product, as in the classical principle of equivalent utility. The pricing mechanism relies heavily on risk preferences and yields two reservation prices - one each for the underwriter and buyer of the contract. The framework is rather general and applies to a number of applications that we extensively analyze.     

Customer complaints in restaurants: Do they differ by service stages and loyalty levels?

Complaints by dissatisfied customers provide managers with an opportunity to learn about problems and take appropriate corrective action to ensure that mistakes do not recur. The authors investigate whether restaurant consumers respond differently to service failures at different service stages and loyalty levels. A survey of 289 customers in the United States found that customers are likely to complain at any service stage following a service failure. Highly loyal customers showed a significantly higher willingness to complain than less loyal customers when a service failure occurs during the greeting/seating and order taking/delivery stages (service stages 1 and 2). Four consumer groups with distinct willingness to complain and levels of loyalty emerged from this study: “silent potential,” “pure complainer,” “silent supporter,” and “loyal voicers.” Among those groups, the silent supporter group (high affective loyalty and low propensity to complain) showed the highest behavioral intentions, whereas the pure complainer group (low affective loyalty and high propensity to complain) showed the lowest behavioral intentions.     

Risk-adjusted credibility premiums using distorted probabilities

Abstract

Denneberg (1990) and Wang (1996a) propose that one calculate risk-adjusted insurance premiums as the expectation with respect to a distorted probability measure, a non-additive set function. This premium principle is supported by the theories of decision making of Yaari (1987) and of Schmeidler (1989). Denneberg (1994a) presents three conditioning rules for updating non-additive set functions in light of available information. In this work, we show how to apply these three update rules to calculate a risk-adjusted credibility premium and, thereby, combine credibility theory with this relatively new premium principle. Our main result is that, for some pairs of distortion function and update rule, one gets the same risk-adjusted credibility premium by distorting the predictive probability distribution, as required by the theory of Yaari, or by updating the distorted probability, as required by the theory of Schmeidler.     

Inferring Information Frequency and Quality

We develop a microstructure model that, in contrast to previousmodels, allows one to estimate the frequency and quality ofprivate information. In addition, the model produces stationaryasset price and trading volume series. We find evidence thatinformation arrives frequently within a day and that this informationis of high quality. The frequent arrival of information, whilein contrast to previous microstructure model estimates, accordswith nonmodel-based estimates and the related literature testingthe mixture-of-distributions hypothesis. To determine if theestimates are correctly reflecting the arrival of latent information,we estimate the parameters over half-hour intervals within theday. Comparison of the parameter estimates with measures ofpersistent price changes reveals that the estimates reflectthe arrival of latent information.     

A note on the relationship between obesity and driving

Vehicle travel and obesity rates in the United States have surged in recent decades. This paper contributes to the mounting evidence of a link between them by drawing attention to a very close relationship between trends in miles driven per licensed driver and adult obesity rates six years later. It also presents evidence on why the effect might be expected to be lagged by six years. A simple model is produced, which predicts reductions in obesity rates over the next few years. If these reductions come about, the model will be seen to offer a powerful insight into the relationship between driving and obesity. If the relationship is more than coincidental, it has implications for transport policy and supports the development of a multi-pronged, interdisciplinary approach to tackle increased driving and obesity.     

New product pricing strategy under customer asymmetric anchoring

Potential customers' willingness to pay (WTP) for a new product can be affected by their observing a posted price and this can be modeled in terms of an anchoring mechanism. A theoretical argument and mathematical proof are developed, showing that if customers use an asymmetric WTP anchoring mechanism, it will normally be optimal for firms to price higher than otherwise. Experimental evidence is provided supporting the notion that an asymmetric anchoring mechanism can be involved in purchase decisions.     

Taxation of Labor Income and the Demand for Risky Assets

This article analyzes the effect of labor income risk on the joint saving/portfolio-composition problem. Given decreasing absolute prudence, we find that even when labor income risk increases overall saving, it tends to lower investment in a risky asset. Applying the theory to public finance, we argue that realistic increases in marginal tax rates on labor can cause large enough reductions in after-tax labor income risk to cause significant increases in risky investment.     

THE ROLE OF SECURITY IN THE FOOD SUPPLIER SELECTION DECISION

This research assesses whether, and under what conditions, firms are willing to trade off price and delivery reliability for greater supplier security. Specifically, international sourcing and concern over security incidents occurring at the respondent's firm are proposed as conditions that may increase demand for supplier security. This research suggests to managers the trade offs their customers may be willing to accept for increased security. The results are useful for firms evaluating whether they should invest in supply chain security measures. Results provide academic insight into the relative importance of security as a supplier selection criterion.     

Planning for education in the health services: a multicriterion approach.

Administrators are often confronted with problems for which there exist several distinct measures of success. Such problems can be expressed in terms of linear programming models with several linear “criterion” functions instead of a single objective function. Although a variety of techniques are available for the solution of multicriterion problems, there exists a need for one which does not assume technical sophistication on the part of the decision maker and which provides valid solutions with minimum effort. “Efficient Manifold Presentation”, the approach used here, is based on the concept that the ideal solution must be a Pareto optimal solution. A method for finding an expression for the finite set of all Pareto optimal solutions to a linear program with multiple linear criteria is presented. Two processes are involved; first, the discovery of all Pareto optimal vertices of the feasible region, and secondly a grouping of these into sets each of which defines a convex polyhedron of Pareto optimal possibilities. Alternate versions of the second process are suggested for use under varying circumstances. An example of the applicability of the method for modeling enrollment and staffing policy in an educational institution is provided.