The comparative statics of deductible insurance in expected- and non-expected-utility theories |
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Authors: | Edward E Schlee |
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Institution: | 1. Department of Economics, Arizona State University, 85287-3806, Tempe, AZ
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Abstract: | This paper identifies comparative statics results for insurance contracts that distinguish between various models of decision making under risk—specifically, expected utility, rank-dependent expected utility, and weighted utility. Insurance contracts offer full coverage above a deductible. Firms offer premium schedules that give the premium charged as a function of the deductible; households choose both an insurance company and a deductible to maximize utility. A competitive equilibrium requires zero expected profit for firms. We identify changes in the distribution of losses such that the optimal deductible increases for utility representations in a particular class but decreases for some representations outside that class. We give results both for the demand for insurance, as well as for the equilibrium contract. |
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