A Note on Partial Insurance and the Arrow-Pratt Measure of Risk Aversion |
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Authors: | W Henry Chiu |
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Institution: | (1) School of Economic Studies, The University of Manchester, Manchester, M13 9PL, UK |
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Abstract: | Pratt 1964] establishes that a more risk-averse individual in the Arrow-Pratt sense has a higher compensating risk premium for full insurance, but no comparable result has been established for partial insurance. Ross 1981] shows that a more risk-averse individual in the Arrow-Pratt sense may not be willing to pay more for a reduction in risk in the sense of mean-preserving contraction. We show that a more risk-averse individual in the Arrow-Pratt sense has a higher compensating risk premium for all empirically relevant forms of partial insurance because they induce a reduction in risk in the stronger sense of Bickel and Lemann 1979].JEL Classification No.: D81 |
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Keywords: | partial insurance Arrow-Pratt measure risk aversion Bickel-Lemann |
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