Title

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

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

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