Robust insurance mechanisms and the shadow prices of information constraints

Robust insurance mechanisms and the shadow prices of information constraints

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Article ID: iaor2000139
Country: New Zealand
Volume: 3
Issue: 1
Start Page Number: 85
End Page Number: 128
Publication Date: Jan 1999
Journal: Journal of Applied Mathematics & Decision Sciences
Authors: , ,
Keywords: insurance
Abstract:

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.

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