Optimal incentive-compatible insurance with background risk

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      <subfield code="c">Yichun Chi, Ken Seng Tan</subfield>
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      <subfield code="a">In this paper, the optimal insurance design is studied from the perspective of an insured, who faces an insurable risk and a background risk. For the reduction of ex post moral hazard, alternative insurance contracts are asked to satisfy the principle of indemnity and the incentive-compatible condition. As in the literature, it is assumed that the insurer calculates the insurance premium solely on the basis of the expected indemnity. When the insured has a general mean-variance preference, an explicit form of optimal insurance is derived explicitly. It is found that the stochastic dependence between the background risk and the insurable risk plays a critical role in the insured's risk transfer decision. In addition, the optimal insurance policy can often change significantly once the incentive-compatible constraint is removed.</subfield>
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      <subfield code="g">10/05/2021 Volumen 51 Número 2 - mayo 2021 , p. 661 - 688</subfield>
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