Disappointment and the optimal insurance contract

Rachel J. Huang, Pai Ta Shih, Larry Y. Tzeng

Research output: Contribution to journalReview articlepeer-review

2 Scopus citations

Abstract

This paper studies the optimal insurance contract under disappointment theory. We show that, when the individuals anticipate disappointment, there are two types of optimal insurance contract. The first type contains a deductible and a coinsurance above the deductible. We find that zero marginal cost is just a sufficient but not a necessary condition for a zero deductible. The second type has no deductible and the optimal insurance starts with full coverage for small losses and includes a coinsurance above an upper value of the full coverage.

Original languageEnglish
Pages (from-to)258-284
Number of pages27
JournalGENEVA Risk and Insurance Review
Volume37
Issue number2
DOIs
StatePublished - Sep 2012

Keywords

  • coinsurance
  • deductible
  • disappointment
  • optimal insurance contract

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