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...

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...

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...

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...