A note on deductible insurance and production

Yaffa Machnes, Kit Pong Wong

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

This paper examines the optimal production decision of a firm facing revenue risk. We show that the purchase of actuarially fair deductible insurance unambiguously induces the firm to produce more if the firm is not only risk averse but also prudent. If the firm's perferences satisfy constant absolute risk aversion, buying actuarially unfair deductible insurance unambiguously enhances production should the positive loading factor be sufficiently small. When there are moral hazard problems in that the firm's output cannot be contracted upon, we show that the purchase of actuarially fair deductible insurance unambiguously induces the firm to produce more if the firm's utility function is quadratic.

Original languageEnglish
Pages (from-to)73-80
Number of pages8
JournalGENEVA Papers on Risk and Insurance Theory
Volume28
Issue number1
DOIs
StatePublished - Jun 2003

Keywords

  • Deductible insurance
  • Production
  • Prudence

Fingerprint

Dive into the research topics of 'A note on deductible insurance and production'. Together they form a unique fingerprint.

Cite this