TY - JOUR
T1 - Expected utility and catastrophic consumption risk
AU - Ikefuji, M.
AU - Laeven, R.J.A.
AU - Magnus, J.R.
AU - Muris, C.
N1 - PT: J; NR: 37; TC: 0; J9: INSUR MATH ECON; PG: 7; GA: CS5QU; UT: WOS:000362133800026
PY - 2015
Y1 - 2015
N2 - 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.
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.
U2 - 10.1016/j.insmatheco.2015.06.007
DO - 10.1016/j.insmatheco.2015.06.007
M3 - Article
SN - 0167-6687
VL - 64
SP - 306
EP - 312
JO - Insurance Mathematics & Economics
JF - Insurance Mathematics & Economics
ER -
