Preserving the Rothschild–Stiglitz type of increasing risk with background risk
Insurance: Mathematics and Economics
Increasing risk, Background risk, Expectation dependence, Mean-preserving spread, Comparison of risk
Background risk refers to a risk that is exogenous and is not subject to transformations by a decision-maker. In this paper, we extend the definition of the Rothschild–Stiglitz type of increasing risk to a background risk framework. We theoretically investigate a more general definition of increase in risk in the presence of background risk. The results suggest that an extended concept of expectation dependence plays a vital role.
The research described here was supported by the Natural Science Foundation of Jiangsu Province, China, Grant No. BK20150732; the National Natural Science Foundation of China with Grant No. 71401074; General Research Fund of the Hong Kong Research Grants Council under Research Project No. LU13500814; the Faculty Research Grant of Lingnan University under Research Project No. DB15A2 and No. DB16A1.
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Guo, X., Li, J. Y., Liu, D. R., & Wang, J. L. (2016). Preserving the Rothschild–Stiglitz type of increasing risk with background risk. Insurance: Mathematics and Economics, 70, 144-149. doi: 10.1016/j.insmatheco.2016.06.008