Production under uncertainty with insurance or hedging
Document Type
Journal article
Source Publication
Insurance: Mathematics and Economics
Publication Date
4-1-2006
Volume
38
Issue
2
First Page
347
Last Page
359
Keywords
Coinsurance-type insurance, Deductible insurance, Hedging, Non-decreasing absolute risk aversion, Production
Abstract
This paper examines the output decision of a risk-averse producer facing profit risk in the presence of insurance or hedging. Conditions under which the producer's output increases upon the introduction of generic insurance are derived, giving rise to conditions for deductible insurance (commodity call options), coinsurance-type insurance (commodity futures), and restricted deductible insurance, respectively. This paper improves upon the literature by considering general profit risk, possibly revenue risk or cost risk, that may not be multiplicative. Moreover, unlike Machnes and Wong's [Geneva Pap. Risk Insurance Theory 28 (2003) 73-80] condition on the loading factor that may not lead to an explicit and unique value, the condition derived in this paper gives rise to a unique upper bound for the loading factor. Finally, their assumptions on the utility function, such as quadratic utility and constant absolute risk aversion for the case of restrictive deductible insurance and zero-loading are made substantial less restrictive.
DOI
10.1016/j.insmatheco.2005.09.006
Print ISSN
01676687
Publisher Statement
Copyright © 2005 Elsevier B.V. All rights reserved. Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Hau, A. (2006). Production under uncertainty with insurance or hedging. Insurance: Mathematics and Economics, 38(2), 347-359. doi: 10.1016/j.insmatheco.2005.09.006