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 -