Expected utility and catastrophic consumption risk

Masako Ikefuji, Roger J A Laeven*, Jan R. Magnus, Chris Muris

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

5 Citations (Scopus)

Abstract

An expected utility based cost-benefit analysis is, in general, fragile to distributional assumptions. We derive necessary and sufficient conditions on the utility function of consumption in the expected utility model to avoid this. The conditions ensure that expected (marginal) utility of consumption and the expected intertemporal marginal rate of substitution that trades off consumption and self-insurance remain finite, also under heavy-tailed distributional assumptions. Our results are relevant to various fields encountering catastrophic consumption risk in cost-benefit analysis.

Original languageEnglish
Pages (from-to)306-312
Number of pages7
JournalInsurance: Mathematics and Economics
Volume64
DOIs
Publication statusPublished - 1 Sep 2015

Keywords

  • Catastrophe
  • Consumption
  • Cost-benefit analysis
  • Expected utility
  • Exponential utility
  • Heavy tails
  • Power utility
  • Risk management and self-insurance

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