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A Note on Deductible Insurance and Production

Author

Listed:
  • Yaffa Machnes

    (Graduate School of Business Administration, Bar Ilan University, Ramat Gan 52900, Israel, e-mail: machny@mail.biu.ac.il)

  • Kit Pong Wong

    (School of Economics and Finance, University of Hong Kong, Pokfulam Road, Hong Kong, People's Republic of China, e-mail: kpwong@econ.hku.hk)

Abstract

This paper examines the optimal production decision of a firm facing revenue risk. We show that the purchase of actuarially fair deductible insurance unambiguously induces the firm to produce more if the firm is not only risk averse but also prudent. If the firm's perferences satisfy constant absolute risk aversion, buying actuarially unfair deductible insurance unambiguously enhances production should the positive loading factor be sufficiently small. When there are moral hazard problems in that the firm's output cannot be contracted upon, we show that the purchase of actuarially fair deductible insurance unambiguously induces the firm to produce more if the firm's utility function is quadratic. The Geneva Papers on Risk and Insurance Theory (2003) 28, 73–80. doi:10.1023/A:1022147932059

Suggested Citation

  • Yaffa Machnes & Kit Pong Wong, 2003. "A Note on Deductible Insurance and Production," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 28(1), pages 73-80, June.
    • Handle: RePEc:pal:genrir:v:28:y:2003:i:1:p:73-80
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    Citations

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    Cited by:

    1. Wenli Wang & Qinhong Zhang, 2021. "Financing the newsvendor: raising the loan limit by insurance contract," Operational Research, Springer, vol. 21(4), pages 2907-2932, December.
    2. Raja Chakir & Julien Hardelin, 2010. "Crop Insurance and Pesticides in French agriculture: an empirical analysis of multiple risks management," Working Papers 2010/04, INRA, Economie Publique.
    3. Wong, Kit Pong, 2012. "Production and insurance under regret aversion," Economic Modelling, Elsevier, vol. 29(4), pages 1154-1160.
    4. Hau, Arthur, 2006. "Production under uncertainty with insurance or hedging," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 347-359, April.
    5. Alessandro Banterle & Daniela Vandone, 2019. "Price volatility and risk management: The case of rice in the EU," Economia agro-alimentare, FrancoAngeli Editore, vol. 21(2), pages 255-274.
    6. Broll, Udo & Roldán-Ponce, Antonio & Wahl, Jack E., 2010. "Spatial allocation of capital: The role of risk preferences," Dresden Discussion Paper Series in Economics 03/10, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.

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