Are generalized call-spreads efficient ?

Carlier, Guillaume; Dana, Rose-Anne

Carlier, Guillaume; Dana, Rose-Anne (2007), Are generalized call-spreads efficient ?, Journal of Mathematical Economics, 43, 5, p. 581-596. http://dx.doi.org/10.1016/j.jmateco.2006.07.008

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Type

Article accepté pour publication ou publié

Date

2007

Journal name

Journal of Mathematical Economics

Volume

Number

Publisher

Elsevier

Pages

581-596

Abstract (EN)

In order to explain coexistence of a deductible for low values of the loss and an upper limit for high values of the loss in insurance contracts, we consider the exchange of risk between two rank dependent expected utility maximizers. It is shown that if the insurer (insured) takes more into account the lowest outcomes – hence maximal losses – than the insured (insurer), then the optimal contract has an upper limit (includes a deductible for high values of the loss). If furthermore, the insured (insurer) neglects the highest outcomes while the insurer (insured) does not, the optimal contract includes a deductible (full insurance) for low values of the loss.

Subjects / Keywords

contract; deductible; upper-limit; call-spread; efficiency