Savings and insurance within the dual theory of choice

This paper provides a joint analysis of savings and insurance choices for consumers who behave according to the dual theory of choice under risk presented by Yaari [Econometrica 55 (1987), 95-116]. While the literature about changes in risk shows how an exogenous mean preserving contraction affects optimal saving, it is shown here that the voluntary purchase of an insurance contract that decreases expected income substitutes for saving. In the general case of more than one source of risk, there is no separation between insurance demand and the saving choice. Thus, the theorem of Dionne and Eeckhoudt [Insurance, Mathematics and Economics 3 (1984), 101-110], developed for consumers who behave according to expected utility theory, is found to be robust for consumers who behave according to Yaari's dual theory.