Risk management activities of a non-industrial private forest owner with a bivariate utility function
- 17 Downloads
We analyze the insurance and self-insurance choices of a private forest owner whose utility is bivariate (consumption and forest amenity value). We show that under fair premium, full insurance is optimal only if the cross derivative of the utility function is equal to zero, whereas under unfair premium, optimal partial insurance is validated only if the cross derivative is positive. We also show that insurance and self-insurance may be substitutes, and if preferences are separable and the cost of insurance is not so high, then insurance and self-insurance are always considered as substitutes. However, we find in an illustration with a non-separable bivariate utility function, characterized by weights given to consumption and amenities, that insurance and self-insurance are complement. We obtain that the weight given to amenities substantially affects optimal risk management activities for unfair insurance. These results highlight the importance to represent the forest owner’s behavior through a bivariate utility function.
KeywordsBivariate utility Cross derivative Forest management Insurance Risk Self-insurance
This paper has been presented at the “Journées de Microéconomie Appliquée” (Clermont-Ferrand, June 2014) and at the International Conference on Economic and Financial Risks (Niort, June 2014). We are grateful to Jean-Louis Combes and Henri Loubergé for their valuable comments and to the participants of these two conferences for interesting discussions. The UMR BETA is supported by a grant from the French National Research Agency (ANR) as part of the “Investissements d’Avenir” program (ANR-11-LABX-0002-01), ARBRE Lab of Excellence.
This work was supported by the project FORWIND (ANR-12-AGRO-0007).
- Amacher, G.S., Ollikainen, M., Koskela, E. (2009). Economics of forest resources. Cambridge: MIT Press.Google Scholar
- Arrow, K. (1963). Uncertainty and the welfare economics of medical care. American Economic Review, 53(5), 941–973.Google Scholar
- Brunette, M., & Couture, S. (2008b). Assurance et activités de réduction des risques en foresterie : Une approche théorique. Revue d’Études en Agriculture et Environnement, 86(1), 57–78.Google Scholar
- Eeckhoudt, L., Godfroid, P., Marchand, M. (1998). Risque de santé, médecine préventive et médecine curative. Revue d’Economie Politique, 108(3), 321–337.Google Scholar
- Eeckhoudt, L., Gollier, C., Schlesinger, H. (2005). Economics and financial decisions under risk. Princeton: Princeton University Press.Google Scholar
- Englin, J., Boxall, P., Hauer, G. (2000). An empirical examination of optimal rotations in a multiple use forest in the presence of fire risk. Journal of Agricultural and Resource Economics, 25(1), 14–27.Google Scholar
- Etner, J., & Spaeter, S. (2012). Self-protection and private insurance with ambiguous and non-pecuniary risks. Working Paper.Google Scholar
- Manley, B., & Watt, R. (2009). Forestry insurance, risk pooling and risk mitigation options. Technical report, Report prepared for MAF Project CM-09 under MAF POL 0809–11194.Google Scholar
- Pattanayak, S.K., Murray, B.C., Abt, R. (2002). How joint is joint forest production? an econometric analysis of timber supply conditional on endogenous amenity values. Forest Science, 47(3), 479–491.Google Scholar
- Schlesinger, H. (2000). The theory of insurance demand. In Handbook of insurance, kluwer academic publishers(chapter 5) (pp. 131–151).Google Scholar
- Tabo, A.L. (2013). Analyse économique des comportements de prévention face aux risques de santé. thèse université Paris Ouest Nanterre La défense.Google Scholar