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AN ECONOMIC PREMIUM PRINCIPLE UNDER THE DUAL THEORY OF THE SMOOTH AMBIGUITY MODEL

Published online by Cambridge University Press:  30 May 2017

Yoichiro Fujii ,
Hideki Iwaki  and
Yusuke Osaki
Yoichiro Fujii
Affiliation:
Faculty of Economics, Osaka Sangyo University, Osaka, Japan, E-Mail: fujii@eco.osaka-sandai.ac.jp
Hideki Iwaki*
Affiliation:
Faculty of Business Administration, Kyoto Sangyo University, Kyoto, Japan
Yusuke Osaki
Affiliation:
Faculty of Economics, Osaka Sangyo University, Osaka, Japan, E-Mail: osaki@eco.osaka-sandai.ac.jp
*
E-Mail: iwaki@cc.kyoto-su.ac.jp
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Abstract

This study considers a pure exchange economy with insurance against ambiguous loss. Ambiguity preferences are represented by the dual theory of the smooth ambiguity model from Iwaki and Osaki (2014). The economic premium principle of Bühlmann (1980, 1984) is extended to ambiguity. We also perform some comparative statics and present sufficient conditions under which an increase in ambiguity aversion increases insurance demand and insurance premiums. Contrary to the result in Tsanakas and Christofides (2006), the optimal demand for insurance is not always comonotonic, because our model permits an economy comprising both ambiguity averse and ambiguity loving agents.

Keywords

Ambiguityeconomic premium principleequilibriumthe dual theory of the smooth ambiguity model
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 47 , Issue 3 , September 2017 , pp. 787 - 801
Copyright
Copyright © Astin Bulletin 2017 

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