State-Dependent Preferences and Insurance Demand
16 Pages Posted: 3 Sep 2009 Last revised: 17 Dec 2009
Date Written: December 11, 2009
We compare the demand for insurance under state-dependent and state-independent preferences when allowing for positive premium loading and continuous state space. We show that the comparison does not only depend on how marginal utility of consumption changes across states - as it does under a fair premium - but also on how the absolute degree of risk aversion changes across states. If both marginal utility and absolute degree of risk aversion change monotonically across states, then a set of state-independent preferences can be specified such that unambiguous comparative results are derived.
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