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Article: Production and insurance under regret aversion

TitleProduction and insurance under regret aversion
Authors
KeywordsInsurance
Production
Regret theory
Revenue risk
Issue Date2012
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ecmod
Citation
Economic Modelling, 2012, v. 29 n. 4, p. 1154-1160 How to Cite?
AbstractThis paper examines the behavior of a regret-averse producer facing revenue risk. To insure against the revenue risk, the producer can purchase a coinsurance contract with an endogenously chosen coinsurance rate. Regret-averse preferences are characterized by a utility function that includes disutility from having chosen ex-post suboptimal alternatives. We show that the regret-averse producer never fully insures against the revenue risk even though the coinsurance contract is actuarially fair. When the producer is sufficiently regret averse and the loss probability is high, we further show that the regret-averse producer chooses not to purchase the actuarially fair coinsurance contract. Even when purchasing the actuarially fair coinsurance contract is optimal, we derive sufficient conditions under which the regret-averse producer reduces the optimal output level as compared to that without the coinsurance contract. These results are distinct from those under pure risk aversion, thereby making the consideration of regret aversion crucial. © 2012 Elsevier B.V.
Persistent Identifierhttp://hdl.handle.net/10722/146921
ISSN
2015 Impact Factor: 0.997
2015 SCImago Journal Rankings: 0.815
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorWong, KPen_HK
dc.date.accessioned2012-05-23T05:49:53Z-
dc.date.available2012-05-23T05:49:53Z-
dc.date.issued2012en_HK
dc.identifier.citationEconomic Modelling, 2012, v. 29 n. 4, p. 1154-1160en_HK
dc.identifier.issn0264-9993en_HK
dc.identifier.urihttp://hdl.handle.net/10722/146921-
dc.description.abstractThis paper examines the behavior of a regret-averse producer facing revenue risk. To insure against the revenue risk, the producer can purchase a coinsurance contract with an endogenously chosen coinsurance rate. Regret-averse preferences are characterized by a utility function that includes disutility from having chosen ex-post suboptimal alternatives. We show that the regret-averse producer never fully insures against the revenue risk even though the coinsurance contract is actuarially fair. When the producer is sufficiently regret averse and the loss probability is high, we further show that the regret-averse producer chooses not to purchase the actuarially fair coinsurance contract. Even when purchasing the actuarially fair coinsurance contract is optimal, we derive sufficient conditions under which the regret-averse producer reduces the optimal output level as compared to that without the coinsurance contract. These results are distinct from those under pure risk aversion, thereby making the consideration of regret aversion crucial. © 2012 Elsevier B.V.en_HK
dc.languageengen_US
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ecmoden_HK
dc.relation.ispartofEconomic Modellingen_HK
dc.rightsNOTICE: this is the author’s version of a work that was accepted for publication in Economic Modelling. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Economic Modelling, 2012, v. 29 n. 4, p. 1154-1160. DOI: 10.1016/j.econmod.2012.04.001-
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectInsuranceen_HK
dc.subjectProductionen_HK
dc.subjectRegret theoryen_HK
dc.subjectRevenue risken_HK
dc.titleProduction and insurance under regret aversionen_HK
dc.typeArticleen_HK
dc.identifier.emailWong, KP: kpwong@econ.hku.hken_HK
dc.identifier.authorityWong, KP=rp01112en_HK
dc.description.naturepostprint-
dc.identifier.doi10.1016/j.econmod.2012.04.001en_HK
dc.identifier.scopuseid_2-s2.0-84860590721en_HK
dc.identifier.hkuros199702en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-84860590721&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume29en_HK
dc.identifier.issue4en_HK
dc.identifier.spage1154en_HK
dc.identifier.epage1160en_HK
dc.identifier.isiWOS:000306299900019-
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridWong, KP=7404759417en_HK
dc.identifier.citeulike10651158-

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