Risk Exchange Under EUUP
28 Pages Posted: 16 Jan 2018
Date Written: January 16, 2018
This study considers a pure exchange economy with insurance against ambiguous loss. Ambiguity preferences are represented by the expected utility with uncertainty (EUUP) theory advocated by Izhakian (2017). The economic premium principle of Buhlmann (1980) is generalized under EUUP. We also perform some comparative statics numerically and show that insurance transactions occur and demand for insurance are not comonotonic due to the difference in the degree of ambiguity aversion even if all of the agents in the economy are ambiguity averse or ambiguity loving. These results bring out distinctly different conclusion of Tsanakas and Christofides (2006), who have extended the Bühlmann’s economic premium principle under the max-min expected utility (MEU) and insisted that insurance demand is comonotonic.
Keywords: Ambiguity, Economic premium principle, Equilibrium, EUUP
JEL Classification: G22, D81, D01, D41
Suggested Citation: Suggested Citation