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http://ssrn.com/abstract=1344239
 
 

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Optimal Casualty Insurance and Repair in the Presence of a Securities Market


An Chen


University of Ulm

Philip H. Dybvig


Washington University in Saint Louis - John M. Olin Business School

November 29, 2013


Abstract:     
We build a simple economic model of optimal casualty insurance based on a story about insuring a house. With endogenous repair and a securities market that is complete over states distinguished by security payoffs, we have three main findings in our base model with additively separable preferences. First, optimal repair depends on security market conditions, with full repair in inexpensive states and little or no repair in expensive states. Second, the optimal insurance payment equals the cost of optimal repair. Third, the agent is not made whole, since the loss is fully compensated only when damage is fully repaired. Weaker versions of the results hold when preferences are not additively-separable. Quite generally, when full repair is optimal it is fully insured.

Number of Pages in PDF File: 32

Keywords: optimal casualty insurance, optimal regulation

JEL Classification: G11, G22

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Date posted: February 16, 2009 ; Last revised: November 30, 2013

Suggested Citation

Chen, An and Dybvig, Philip H., Optimal Casualty Insurance and Repair in the Presence of a Securities Market (November 29, 2013). Available at SSRN: http://ssrn.com/abstract=1344239 or http://dx.doi.org/10.2139/ssrn.1344239

Contact Information

An Chen (Contact Author)
University of Ulm ( email )
Helmholzstrasse
Ulm, D-89081
Germany
HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team
Philip H. Dybvig
Washington University in Saint Louis - John M. Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
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