Financing State-Dependent Indivisible Expenses With Insurance

35 Pages Posted: 27 May 2020

See all articles by Markus Fels

Markus Fels

University of Dortmund - Department of Economics

Date Written: April 28, 2020

Abstract

Standard economic theory interprets insurance as a means for risk-averse individuals to transfer risk. I argue that another important function of insurance is to optimally finance indivisible expenses that only have value in particular states of nature. Contrary to traditional predictions, insurance is then a normal good, the additional consumption of the covered goods and services by the insured is not a sign of inefficiency, and the marginal-utility gap between states is not informative about the value of insurance. Acknowledging this additional purpose of insurance requires a novel understanding of risk attitudes in general, and a reconsideration and possibly reevaluation of previous policy advice.

Keywords: Indivisible Consumption, State-Dependence, Insurance

JEL Classification: D01,D81

Suggested Citation

Fels, Markus, Financing State-Dependent Indivisible Expenses With Insurance (April 28, 2020). Available at SSRN: https://ssrn.com/abstract=3587649 or http://dx.doi.org/10.2139/ssrn.3587649

Markus Fels (Contact Author)

University of Dortmund - Department of Economics ( email )

D-44221 Dortmund
Germany

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