Expected utility and catastrophic consumption risk

M. Ikefuji, R.J.A. Laeven, J.R. Magnus, C. Muris

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

An expected utility based cost-benefit analysis is, in general, fragile to distributional assumptions. We derive necessary and sufficient conditions on the utility function of consumption in the expected utility model to avoid this. The conditions ensure that expected (marginal) utility of consumption and the expected intertemporal marginal rate of substitution that trades off consumption and self-insurance remain finite, also under heavy-tailed distributional assumptions. Our results are relevant to various fields encountering catastrophic consumption risk in cost-benefit analysis.
Original languageEnglish
Pages (from-to)306-312
JournalInsurance Mathematics & Economics
Volume64
DOIs
Publication statusPublished - 2015

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Expected Utility
Cost-benefit Analysis
Utility Function
Insurance
Substitution
Trade-offs
Necessary Conditions
Expected utility
Sufficient Conditions
Cost-benefit analysis
Model

Bibliographical note

PT: J; NR: 37; TC: 0; J9: INSUR MATH ECON; PG: 7; GA: CS5QU; UT: WOS:000362133800026

Cite this

Ikefuji, M. ; Laeven, R.J.A. ; Magnus, J.R. ; Muris, C. / Expected utility and catastrophic consumption risk. In: Insurance Mathematics & Economics. 2015 ; Vol. 64. pp. 306-312.
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Expected utility and catastrophic consumption risk. / Ikefuji, M.; Laeven, R.J.A.; Magnus, J.R.; Muris, C.

In: Insurance Mathematics & Economics, Vol. 64, 2015, p. 306-312.

Research output: Contribution to JournalArticleAcademicpeer-review

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AU - Ikefuji, M.

AU - Laeven, R.J.A.

AU - Magnus, J.R.

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AB - An expected utility based cost-benefit analysis is, in general, fragile to distributional assumptions. We derive necessary and sufficient conditions on the utility function of consumption in the expected utility model to avoid this. The conditions ensure that expected (marginal) utility of consumption and the expected intertemporal marginal rate of substitution that trades off consumption and self-insurance remain finite, also under heavy-tailed distributional assumptions. Our results are relevant to various fields encountering catastrophic consumption risk in cost-benefit analysis.

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DO - 10.1016/j.insmatheco.2015.06.007

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EP - 312

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JF - Insurance Mathematics & Economics

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