Economic Analysis of Risk and Uncertainty Induced by Health Shocks: A Review and Extension
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equilibrium insurance coverage. Arrow’s seminal work on insurance contemplated the
situation where insurance prices would deviate from actuarially fair values due to pro-
duction costs of various kinds, such as those relating to agent commissions and to com-
pany overhead. The impact on insurance purchase of course depends on the nature of
the cost structure. Arrow showed that, in circumstances where the premium was deter-
mined by the expected loss times a proportional expense loading, the optimal insurance
contract would feature full coverage beyond a ...
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