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Expectation Dependence and the Bernoulli Principle Under Multiple Sources of Risk

  • Journal of Insurance and Finance
  • 2007, 18(2), pp.79-114
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Hong,Soon-Koo 1

1서울산업대학교

Accredited

ABSTRACT

This paper examines the Bernoulli Principle when an individual faces both a background risk and an interdependent insurable risk. The background risk is modelled as an initial random wealth. Within this model, using "expectation dependence" developed by Wright(1987), we provide the necessary and sufficient conditions for the Bernoulli Principle to hold or violate. That is, it is shown that the rational individual would buy less than, full or more than full insurance if and only if the expectation dependence is positive, zero or negative, respectively. These results extend the recent conclusion of, for example, Aboudi.Thon(1995) or Hong(2001, 2004) in two ways: 1.The notions of expectation dependence are less restrictive than those of regression dependence in Aboudi.Thon(1995) or those of Brumelle(1974)'s interdependence in Hong(2001, 2004); 2.We give conditions that are both necessary and sufficient, while Aboudi.Thon(1995) or Hong(2001, 2004) suggested only the sufficient, but not necessary, conditions for the Bernoulli Principle.

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