Abstract
This paper addresses the question of whether uninsurable background risk will lead people to buy more insurance against other risks that are insurable. The conditions of decreasing absolute risk aversion and decreasing absolute prudence on the utility function and either statistical independence or a general condition indicating a positive relationship between the background risk and the other risk are shown to be enough to guarantee that background risk will increase the optimal amount of insurance against the other risk. In particular, background risk raises the optimal coinsurance rate and reduces the optimal level of the deductible (for any given coinsurance rate).
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© 1992 Springer Science+Business Media New York
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Eeckhoudt, L., Kimball, M. (1992). Background Risk, Prudence, and the Demand for Insurance. In: Dionne, G. (eds) Contributions to Insurance Economics. Huebner International Series on Risk, Insurance and Economic Security, vol 13. Springer, Dordrecht. https://doi.org/10.1007/978-94-017-1168-5_8
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DOI: https://doi.org/10.1007/978-94-017-1168-5_8
Publisher Name: Springer, Dordrecht
Print ISBN: 978-90-481-5788-4
Online ISBN: 978-94-017-1168-5
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