Robust insurance mechanisms and the shadow prices of information constraints

We consider a risky economic project that may yield either profits or losses, depending on random events. We study an insurance mechanism under which the plan of project implementation maximizing the expected value of profits becomes optimal almost surely. The mechanism is linear in the decision variables, ‘actuarially fair’ and robust to changes in the utility function. The premium and the compensation in the insurance scheme are expressed through dual variables associated with information constraints in the problem of maximization of expected profits. These dual variables are interpreted as the shadow prices of information. Along with the general model, several specialized models are considered in which the insurance mechanism and the shadow prices are examined in detail.