Flexibility,endogenous risk,and the protection premium |
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Authors: | Sergio H Lence Bruce A Babcock |
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Abstract: | We introduce two types of protection premia. The unconstrained protection premium, u, is the individual's willingness to pay for certain protection efficiency given flexibility to adjust optimally the investment in protection. The constrained protection premium, c, measures willingness to pay for certain protection efficiency given no flexibility to adjust the investment in protection. u depends on tastes and wealth as well as protection technology whereas c depends only on technology. We show that c cannot exceed u and develop necessary conditions for c= u. Optimal protection for an individual with decision flexibility may be larger or smaller than that desired under no flexibility.Journal Paper No. J-15504 of the Iowa Agriculture and Home Economics Experiment Station, Ames, Iowa. Project No. 3048. |
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Keywords: | Endogenous risk protection premium flexibility |
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