Pareto optimal exchange of risk and to show how risk aversion by insurers can explain
partial coverage. Arrow (1965) used the same argument to introduce some element of
coinsurance in optimal insurance contracts. Moreover, Arrow (1963) showed that if a
risk neutral insurer offers a policy with a premium equal to the expected indemnity
plus a proportional loading then the optimal contract provides full coverage of losses
above a deductible. These forms of partial insurance limit the possibilities of risk shifting
between economic agents (Arrow, 1965).
Raviv (1979) extended these results and showed that ...
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