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Publication - Dr Chris Muris

    Expected utility and catastrophic consumption risk

    Citation

    Ikefuji, M, Laeven, RJA, Magnus, JR & Muris, C, 2015, ‘Expected utility and catastrophic consumption risk’. Insurance: Mathematics and Economics, vol 64., pp. 306-312

    Abstract

    An expected utility based cost-benefit analysis is, in general, fragile to distributional assumptions. We derive necessary and sufficient conditions on the utility function of consumption in the expected utility model to avoid this. The conditions ensure that expected (marginal) utility of consumption and the expected intertemporal marginal rate of substitution that trades off consumption and self-insurance remain finite, also under heavy-tailed distributional assumptions. Our results are relevant to various fields encountering catastrophic consumption risk in cost-benefit analysis.

    Full details in the University publications repository