Table of Contents
Journal of Applied Mathematics and Decision Sciences
Volume 3, Issue 1, Pages 85-128
http://dx.doi.org/10.1155/S1173912699000061

Robust insurance mechanisms and the shadow prices of information constraints

1Central Economics and Mathematics Institute, Academy of Sciences of Russia, Nakhimovsky 47, Moscow 117418, Russia
2Department of Economics, University of Groningen, P.O. Box 800, Groningen 9700, AV, The Netherlands
3Department of Economics, 114 Rouss Hall, University of Virginia, Charlottesville Va. 22903-3288, USA

Copyright © 1999 Hindawi Publishing Corporation. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We consider a risky economic project that may yield either profits or losses, depending on random events. We study an insurance mechanism under which the plan of project implementation maximizing the expected value of profits becomes optimal almost surely. The mechanism is linear in the decision variables, “actuarially fair” and robust to changes in the utility function.

The premium and the compensation in the insurance scheme are expressed through dual variables associated with information constraints in the problem of maximization of expected profits. These dual variables are interpreted as the shadow prices of information. Along with the general model, several specialized models are considered in which the insurance mechanism and the shadow prices are examined in detail.