All Rights Reserved
AccessEcon LLC 2006, 2008.
Powered by MinhViet JSC
ralph lauren polo

 
Rodrigo J Raad, Gilvan Guedes and Lucélia Vaz
 
''Insurance Contracts under Beliefs Contamination''
( 2019, Vol. 39 No.4 )
 
 
We propose an insurance model introducing a global contamination on agents' beliefs over exogenous and endogenous variables. We establish conditions for the elasticity of contamination such that insurance demand declines with an increase in the level of such contamination. Our model assumes that agents are risk averse and distort their beliefs about exogenous events. Distortion also influences expectations over insurance transfers by strategic default, and leads to a price markup in relation to its actuarilly fair level as markets select larger insurers, increasing their market power. We impose boundaries on the relation between risk aversion and the elasticity of contamination, which is robust in the sense that insurance demand will decline even when the beliefs contamination leads to an increase in the probability of large loss. We further show that contracts are not efficient, resulting in a long run welfare loss.
 
 
Keywords: Risk aversion, Insurance, Subjective probability, Elasticity, Beliefs Contamination
JEL: D5 - General Equilibrium and Disequilibrium: General
D8 - Information, Knowledge, and Uncertainty: General
 
Manuscript Received : May 06 2019 Manuscript Accepted : Dec 16 2019

  This abstract has been downloaded 41 times                The Full PDF of this paper has been downloaded 106174 times