What is state-contingent uncertainty?
The state-contingent approach developed by Chambers and Quiggin (2000) constitutes an attractive blend of a theory of production analysis under uncertainty and a theory of decision-making under uncertainty.
What is state-contingent consumption?
A state-contingent consumption plan is implemented only when a particular state of Nature occurs. E.g. take a vacation only if there is no accident.
What is a contingent consumption plan?
Contingent consumption plan: an insurance company will pay for the cost if an accident happens. Also, suppose that an accident will happen with a probability π.
What would be the premium for actuarially fair insurance for the pooled risk?
Consider insurance that is actuarially fair, meaning that the premium is equal to expected claims: Premium = p·A where p is the expected probability of a claim, and A is the amount that the insurance company will pay in the event of an accident.
What is contingent commodity?
A good that is available only if a particular event (or ‘state of the world’) occurs, for example an ice cream delivered only if the sun shines. Contingent commodities form the basis of general equilibrium models of uncertainty since a financial security can be modelled as delivering a bundle of contingent commodities.
Which type of insurance is usually most preferred by a risk averse consumer?
3. Risk-averse consumers always prefer insurance that is actuarially fair but not full to full insurance that is actuarially unfair – but the opposite is true for risk-loving consumers.
Are insurance companies likely to offer insurance at an actuarially fair price?
Actual insurance premiums are rarely actuarially fair, partially due to a firm making profit, but also due to other factors: administration. moral hazard. adverse selection.
What was Bernoulli’s error?
The error that Bernoulli made, a psychological error–a big one, actually–was he decided to look at the outcome of the gamble and the utility of that outcome. But the utility of what? He describes it as the utility of the state of wealth that would ensue, depending on what happened.
What premium would a risk neutral person be willing to pay?
Risk neutral and risk loving people are willing to pay less than or equal to the average or expected value of the expense. They are willing to pay up to, but no more than, $100. Risk averse people, in contrast, are willing to pay more than $100.
When insurance is fair in a sense it is all free?
When insurance is far, in a sense, it is also free. TRUE: The customer’s expected income does not change from buying the contract, so she effectively pays nothing for it. Despite the fact that the premium (r) is positive in an actuarially fair contract, the price is actually zero.
What do you mean by contingent consumption plan?
Contingent means depending on something not yet certain, so a contingent consumption plan means a plan that depends on the outcome of some event. In the case of insurance purchases, the contingent consumption was described by the terms of the insurance contract: how much money you would have if a loss occurred…
What does history tells us about state-contingent debt instruments?
The idea of sovereign state-contingent debt instruments (SCDIs), which would link contractual debt service obligations to a pre-defined state variable, has been around for some time (Krugman 1988, Shiller 1993, and more recently, Blanchard et al. 2016 for a recent contribution) but market development has been limited so far.
What is the endowment point of contingent consumption?
Your endowment of contingent consumption is $25,000 in the “bad” state^—if the loss occurs—and $35,000 in the “good” state—if it doesn’t occur. Insurance offers you a way to move away from this endowment point.
When was the first use of contingent bonds?
The first use of state contingent bonds in debt restructurings occurred in the Brady deals from 1989-97, which allowed commercial banks’ claims on debtor countries to be exchanged for tradable instruments, allowing the banks to clean up their balance sheets.