Academic journal article Journal of Risk and Insurance

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Academic journal article Journal of Risk and Insurance

From the Library Shelf

Article excerpt

ECONOMICS OF INFORMATION

Adverse Selection with Endogenous Information in Insurance Markets, by Neil A. Doherty (University of Pennsylvania) and Paul D. Thistle (Western Michigan University, Kalamazoo)

Models of adverse selection assume that risk type is known to the consumer but not to the insurer. Many analysts suggest that information has zero social value and negative prior value. Why then would consumers become informed? What is the incentive to gather information and why does adverse selection arise? We show that the private value of information is non-negative only if insurers cannot observe consumers' information status, or if consumers can conceal their informational status. We examine the existence and characterization of equilibria under different configurations of the endogenous information model for public policy regarding genetic testing and for state regulations concerning HIV testing. Journal of Public Economics, December 1996, (63)1: 83-102. (Reprinted with permission of North-Holland Publishing Company.)

RISK PERCEPTION AND ECONOMIC BEHAVIOR

Risk Propensity and Firm Performance: A Study of the Petroleum Exploration Industry, by Michael R. Walls (Colorado School of Mines) and James S. Dyer (University of Texas)

This paper explores the differences in observed risk propensity among petroleum firms and their impact on firm performance. In this work, we (1) develop a decision theoretic model which measures a firm's risk propensity in the form of an "implied" utility function; (2) investigate changes in corporate risk propensity with respect to changes in firm size; and (3) examine the relationships between firms' risk propensities and alternative dimensions of economic performance, including ex post risk and return measures. We also develop a new risk propensity measure, the Risk Tolerance Ratio (RTR), which controls for firm size and allows firms to be differentiated in terms of relative risk propensity. The motivation for this work is managerial concerns regarding appropriate risk-taking behavior and the effect of risky choice on firm performance. Management Science, July 1996, (42)7: 1004-1021. (Reprinted with permission of Management Science.)

Risk Vulnerability and the Tempering Effect of Background Risk, by Christian Gollier (University of Toulouse) and John W. Pratt (Harvard University)

We examine in this paper a new natural restriction on utility functions, namely that adding an unfair background risk to wealth makes risk-averse individuals behave in a more risk-averse way with respect to any other independent risk. This concept is called risk vulnerability. It is equivalent to the condition that an undesirable risk can never be made desirable by the presence of an independent, unfair risk. Moreover, under risk vulnerability, adding an unfair background risk reduces the demand for risky assets. Risk vulnerability generalizes the concept of properness (individually undesirable, independent risks are always jointly undesirable) introduced by Pratt and Zeckhauser (1987.) It implies that two first derivatives of the utility function are concave transformations of the original function. Under decreasing absolute risk aversion, a sufficient condition for risk vulnerability is local properness, i.e. [r.sup.n] [greater than or equal to] r[prime]r, where r is the Arrow-Pratt coefficient of absolute risk aversion. Econometrica, September 1996, (64)5: 1109-1123. (Reprinted with permission of Econometrica.)

Repeated Optional Gambles and Risk Aversion, by Christian Gollier (University of Toulouse)

We analyze in this paper the effect of age on the optimal dynamic strategy toward repeated independent gambles. When deciding to accept or reject a lottery that is offered today, the gambler knows how many lotteries can yet be played in the future. We first characterize the optimal dynamic strategy when future lotteries are identically distributed. We show that the existence of future lotteries always increases the willingness to gamble today. …

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