Expected utility and catastrophic consumption risk

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

doi:10.1016/j.insmatheco.2015.06.007

Expected utility and catastrophic consumption risk

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

Research output: Contribution to Journal › Article › Academic › peer-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 language	English
Pages (from-to)	306-312
Journal	Insurance Mathematics & Economics
Volume	64
DOIs	https://doi.org/10.1016/j.insmatheco.2015.06.007
Publication status	Published - 2015

Bibliographical note

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

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 8 Decent Work and Economic Growth

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10.1016/j.insmatheco.2015.06.007

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Cite this

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title = "Expected utility and catastrophic consumption risk",

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.",

author = "M. Ikefuji and R.J.A. Laeven and J.R. Magnus and C. Muris",

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AU - Ikefuji, M.

AU - Laeven, R.J.A.

AU - Magnus, J.R.

AU - Muris, C.

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PY - 2015

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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

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