Non-expected utility and the robustness of the classical insurance paradigm

Abstract

This chapter uses the technique of "generalized expected utility analysis" to explore the robustness of some of the basic results in classical insurance theory to departures from the expected utility hypothesis on agents' risk preferences. The topics include individual demand for coinsurance and deductible insurance, the structure of Pareto-efficient bilateral insurance contracts, the structure of Pareto-efficient multilateral risk sharing agreements, self-insurance vs. Self-protection, and insurance decisions under ambiguity. Most, though not all, of the basic results in these areas are found to be quite robust to dropping the expected utility hypothesis.