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We explore the effects that optimism bias has on the demand for insurance. Our theory is based on a simple binomial model of the demand for insurance in which consumers make optimistically biased assessments concerning the likelihood of future outcomes. From this model, we derive an insurance...
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We address two apparent paradoxes of risk management: (1) managers hedge in order to avoid negative earnings surprises, yet they tend to hedge risks uninformative of the value of the company; and (2) the presence of options in managers' compensation distorts their incentive to hedge, inducing...
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This paper extends the theoretical literature on underwriting cycles by assuming insurers have heterogeneous exposure to a catastrophe. Distinct from the existing literature on insurance cycles, we model optimal contracting by competitive insurers. Since losses take time to pay out, and insurers...
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This paper looks for evidence of adverse selection in the relationship between primary insurers and reinsurers. We test the implications of a model in which informational asymmetry – and therefore, its negative consequences – decline over time. Our tests involve a data panel consisting of...
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