nep-ias New Economics Papers
on Insurance Economics
Issue of 2010‒04‒11
three papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The impact of ambiguity on health prevention and insurance. By Johanna Etner; Sandrine Spaeter
  2. Affective Decision-Making: A Theory of Optimism-Bias By Anat Bracha; Donald J. Brown
  3. Fraud deterrence in dynamic Mirrleesian economies By Roc Armenter; Thomas M. Mertens

  1. By: Johanna Etner; Sandrine Spaeter
    Abstract: In this paper, we analyze the choice of primary prevention made by individuals who bear a risk of being in bad health and an additive risk (of complications) that occurs after a disease has been diagnosed. By considering a two argument utility (depending on wealth and health), we show that the presence of a well-known (no ambiguity) additive risk of complications induces more investment in primary prevention by a risk-averse agent only if her preferences does not display some cross prudence in wealth (u122 < 0). If there is some ambiguity on the e¤ective probability of complication, an increase in ambiguity aversion increases prevention if the agent is a correlation lover (u12 > 0). We also show that full (partial) insurance can be optimal even if insurance premia are loaded (fair). These results hold with and without prevention and the individuals attitudes toward correlation help explain the impact of ambiguity on the optimal individual decisions.
    Keywords: health; utility; ambiguity; prevention; insurance.
    JEL: D81 I19
    Date: 2010
  2. By: Anat Bracha (Federal Reserve Bank of Boston); Donald J. Brown (Department of Economics, Yale University)
    Abstract: Optimism-bias is inconsistent with the independence of decision weights and payoffs found in models of choice under risk, such as expected utility theory and prospect theory. Hence, to explain the evidence suggesting that agents are optimistically biased, we propose an alternative model of risky choice, affective decision-making, where decision weights -- which we label affective or perceived risk -- are endogenized. Affective decision making (ADM) is a strategic model of choice under risk, where we posit two cognitive processes: the "rational" and the "emotional" processes. The two processes interact in a simultaneous-move intrapersonal potential game, and observed choice is the result of a pure strategy Nash equilibrium in this potential game. We show that regular ADM potential games have an odd number of locally unique pure strategy Nash equilibria, and demonstrate this finding for affective decision making in insurance markets. We prove that ADM potential games are refutable, by axiomatizing the ADM potential maximizers.
    Keywords: Affective decision-making, Optimism-bias, ADM potential games, Demand for insurance
    JEL: D01 D81 G22
    Date: 2010–03
  3. By: Roc Armenter; Thomas M. Mertens
    Abstract: Social and private insurance schemes rely on legal action to deter fraud and tax evasion. This observation guides the authors to introduce a random state verification technology in a dynamic economy with private information. With some probability, an agent's skill level becomes known to the planner, who prescribes a punishment if the agent is caught misreporting. The authors show how deferring consumption can ease the provision of incentives. As a result, the marginal benefit may be below the marginal cost of investment in the constrained-efficient allocation, suggesting a subsidy on savings. They characterize conditions such that the intertemporal wedge is negative in finite horizon economies. In an infinite horizon economy, the authors find that the constrained-efficient allocation converges to a high level of consumption, full insurance, and no labor distortions for any probability of state verification.
    Keywords: Insurance ; Fraud
    Date: 2010

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