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A Theory of Rational Demand for Index Insurance
Abstract
Rational demand for index insurance products is shown to be fundamentally different to that for indemnity insurance products due to the presence of basis risk. In particular, optimal demand is zero for infinitely risk-averse individuals, and is nonmonotonic in risk aversion, wealth, and price. For a given belief, upper bounds are derived for the optimal demand from risk-averse and decreasing absolute risk-averse decision makers. A simple ratio for monitoring basis risk is presented and applied to explain the low level of demand for consumer hedging instruments as a rational response to deadweight costs and basis risk. (JEL D14, D81, G13, G22, Q14)
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Agricultural Decisions after Relaxing Credit and Risk Constraints *
Karlan, D., Osei, R., Osei-Akoto, I., & Udry, C. (2014) · The Quarterly Journal of Economics · doi:10.1093/qje/qju002 · Cited by 1,056
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Risk preferences and development revisited
Vieider, F. M., Martinsson, P., Nam, P. K., & Truong, N. (2019) · Theory and Decision · doi:10.1007/s11238-018-9674-8 · Cited by 47
Metadata
- Authors
- Clarke, D. J.
- Venue
- American Economic Journal: Microeconomics
- Publisher
- American Economic Association
- Published
- 2016-02-01
- Volume
- 8
- Issue
- 1
- Pages
- 283-306
- ISSN
- 1945-7669 (ISSN-L)
- 1945-7685
- OpenAlex
- W2297248573
- Cited by
- 292
- References
- 1
- FWCI
- 36.12
- Type
- journal article
- Language
- en
- Open access
- closed
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