Rachel Huang | Yuan Ze University (original) (raw)
Papers by Rachel Huang
Theory and Decision, 2014
This paper weakens the expectation dependence concept due to and its higher-order extensions prop... more This paper weakens the expectation dependence concept due to and its higher-order extensions proposed by Li (2011) to conform with the preferences generating the almost stochastic dominance rules introduced in Leshno and Levy . A new dependence concept, called excess dependence is introduced, and studied in addition to expectation dependence. This new concept coincides with expectation dependence at first-degree but provides distinct higher-order extensions. Three applications, to portfolio diversification, to the determination of the sign of the equity premium in the consumption-based CAPM and to optimal investment in the presence of a background risk, illustrate the usefulness of the approach proposed in the present paper.
Economic Theory, 2014
Your article is protected by copyright and all rights are held exclusively by Springer-Verlag Ber... more Your article is protected by copyright and all rights are held exclusively by Springer-Verlag Berlin Heidelberg. This e-offprint is for personal use only and shall not be selfarchived in electronic repositories. If you wish to self-archive your article, please use the accepted manuscript version for posting on your own website. You may further deposit the accepted manuscript version in any repository, provided it is only made publicly available 12 months after official publication or later and provided acknowledgement is given to the original source of publication and a link is inserted to the published article on Springer's website. The link must be accompanied by the following text: "The final publication is available at link.springer.com".
Operations Research, 2015
Geneva Risk and Insurance Review, 2006
This paper discusses optimal insurance contract for irreplaceable commodities. To describe the du... more This paper discusses optimal insurance contract for irreplaceable commodities. To describe the dual impacts on individuals when a loss occurs to the insured irreplaceable commodities, we use a state-dependent and bivariate utility function, which includes both the monetary wealth and sentimental value as two arguments. We show that over (full, partial) insurance is optimal when a decrease in sentimental value will increase (not change, decrease, respectively) the marginal utility of monetary wealth. Moreover, a non-zero deductible exists even without administration costs. Furthermore, we demonstrate that a positive fixed reimbursement is optimal if (1) the premium is actuarially fair, (2) the monetary loss is a constant, and (3) the utility function is additively separable and the marginal utility of money is higher in the loss state than in the no-loss state. We also characterize comparative statics of fixed-reimbursement insurance under an additively separable preference assumption.
This paper analyses the welfare eect of a tax deduction system for personal losses when individua... more This paper analyses the welfare eect of a tax deduction system for personal losses when individuals consider anticipated regret in their decision making process. Under expected utility theory, Kaplow (1992) showed that providing such tax deductions partially crowds out the demand for private insurance and reduces welfare. While we con…rm the crowd out eect under regret preferences, providing tax deduction
SSRN Electronic Journal, 2000
The "annuity puzzle," which describes the inconsistency between the theoretical prediction of ful... more The "annuity puzzle," which describes the inconsistency between the theoretical prediction of full annuitization and the low rate of annuitization in reality has recently been widely discussed in the literature. In this paper, we propose that anticipatory anxiety is one of the rationales for the annuity puzzle. By setting up a two-period model under anticipatory anxiety, which is a decreasing function of the average of future consumption and an increasing function of the riskiness of future consumption as modeled by Caplin and Leahy , we find that the optimal conditions for partial annuitization as well as the optimal annuitization level are sensitive to the degree of anxiety. If purchasing annuities can reduce the disutility from anxiety, then the individual will decrease the investment in the annuity when his/her degree of anxiety increases. Moreover, given reasonable parameters, our simulation results show that anxiety can explain why individuals annuitize their income at a relatively low level.
This paper shows that providing tax deductions for individuals&am... more This paper shows that providing tax deductions for individuals' net losses could be optimal for the government when (1) the government's aggregated utility function is more risk-averse than that of the representative individual, or (2) the insured is overly optimistic with regard to the loss probability. The results of this paper could be further applied to explain why a government
- indicated that individuals with a higher degree of risk aversion would demand more insuranc... more 2001) indicated that individuals with a higher degree of risk aversion would demand more insurance and invest in self-protection to reduce risk probability when both the preference type and investment in self-protection are hidden from insurers. They referred to the negative correlation between market insurance and risk type as advantageous selection. However, the relationship between risk type and the degree of risk aversion is debatable in both theoretical and empirical research. This paper therefore proposes that advantageous selection could be supported from another angle by directly examining the relationships that exist among market insurance, selfprotection, and risk probability. By focusing on the commercial fire insurance market, information on the purchase of market insurance, investment in self-protection, and fire accident records is hand-collected by means of a unique survey. It is found that firms purchasing market insurance have a greater tendency to channel efforts into selfprotection. It is also found that firms expending effort on self-protection are less likely to suffer a fire accident. Furthermore, it is found that firms with commercial fire insurance have less chance of suffering a fire accident than those without such insurance. Each of the above three findings jointly supports the view that advantageous selection could play a critical role in the commercial fire insurance market.
Geneva Risk and Insurance Review, 2010
Theories of adverse selection and moral hazard predict the occurrence of the risk and the coverag... more Theories of adverse selection and moral hazard predict the occurrence of the risk and the coverage of the insurance should be positively correlated, whereas empirical researches find little support of it. This paper provides a theoretical model of hidden overconfidence and demonstrates that a competitive insurance market may settle on separating equilibrium with advantageous selection predicting a negative relationship between
Geneva Risk and Insurance Review, 2007
Using the representative agent approach as in Kaplow (Am Econ Rev 82:1013-1017, this paper shows ... more Using the representative agent approach as in Kaplow (Am Econ Rev 82:1013-1017, this paper shows that providing tax deductions for the individual's net losses is socially optimal when the insurer faces the risk of insolvency. We further show that the government should adopt a higher tax deduction rate for net losses when the insurer is insolvent than when the insurer is solvent. Thus, tax deductions for net losses could be used to provide an insurance for individuals against the insurer's risk of insolvency. These findings could also be used to explain why a government provides supplementary public insurance or government relief. Finally, we discuss that, if the individuals are heterogeneous in terms of loss severity, loss probability, or income level, providing a tax deduction for the individual's net losses may not always achieve a Pareto improvement, and cross subsidization should be taken into consideration.
When decision makers invest in effort to reach their targets, they face multiple sources of risk:... more When decision makers invest in effort to reach their targets, they face multiple sources of risk: first the risk of failure and second the noise that surrounds either the target or the initial situation. In this paper, we examine how effort is adjusted to account for changes in this risky environment.
While the concept of precautionary saving is well documented, that of precautionary e¤ort has rec... more While the concept of precautionary saving is well documented, that of precautionary e¤ort has received relatively limited attention. In this note, we set up a two period model in order to analyze the conditions under which the introduction (or deterioration) of an independent background risk increases e¤ort.
This paper seeks to determine whether governments should intervene in the private annuity market ... more This paper seeks to determine whether governments should intervene in the private annuity market by directly providing public insurance in the form of annuities when both the government and the insurance companies could default. It is found that, although the government could default, intervening by means of an annuity can improve social welfare if the insurance companies could default and the expected return on the public annuity is greater than the rate of return on a risk-free bond. We also find that, under actuarially fair pricing, the government should provide more in terms of a public annuity than the optimal amount of the annuity that the individual purchases in the private market if the government is less likely to default on the public annuity than an insurance company would in the case of a private annuity.
This paper studies the optimal insurance contract under disappointment theory. We show that, when... more This paper studies the optimal insurance contract under disappointment theory. We show that, when the individuals anticipate disappointment, there are two types of optimal insurance contract. The first type contains a deductible and a coinsurance above the deductible. We find that zero marginal cost is just a sufficient but not a necessary condition for a zero deductible. The second type has no deductible and the optimal insurance starts with full coverage for small losses and includes a coinsurance above an upper value of the full coverage.
This paper proposes that vehicle maintenance is one of the factors affecting the probability of a... more This paper proposes that vehicle maintenance is one of the factors affecting the probability of automobile accidents. To test the hypothesis, we use a unique data set which is merged from an insurance company and a vehicle manufacturer in Taiwan. The total number of observations in our final sample is 155,116. We find that proper maintenance defined by the recommended kilometers is significantly negatively correlated with loss probability in compulsory automobile liability insurance. On average, maintenance will decrease the loss probability by between 0.165% and 0.261% according to different proxies for proper maintenance, whereas the average loss probability for the overall sample is 0.93%. We further find that proper maintenance is insignificantly correlated with loss severity. JEL classification: G22, C12, D01 Recently, Brockett and Golden (2007) provide a detailed survey of the related literature and classify the risk factors to biological, psychological and behavioral characteristics. More importantly, they hypothesize that the reason that credit scoring works in underwriting automobile insurance is that there is an underlying biological and/or psychological and social component of each individual which regulates their risk taking behavior, and, since this propensity is individual and intrinsic, it spans risk 1 The data are obtained from the U.S. Census Bureau, Statistical Abstract of the United States: 2010, .
This paper investigates the relationship between mortality rates and the equity premium. We propo... more This paper investigates the relationship between mortality rates and the equity premium. We propose that the improvement in the risk perception of mortality rates could increase the anxiety from holding risky assets and further change the demand for them.
We examine insurance markets in which there are two types of customers: those who regret suboptim... more We examine insurance markets in which there are two types of customers: those who regret suboptimal decisions and those who don't. In this setting, we characterize the equilibria under hidden information about the type of customers and hidden action. We show that both pooling and separating equilibria can exist. Furthermore, there exist separating equilibria that predict a positive correlation between the amount of insurance coverage and risk type, as in the standard economic models of adverse selection, but there also exist separating equilibria that predict a negative correlation between the amount of insurance coverage and risk type, i.e. advantageous selection.
Bi-Sb-Ag and Bi-Sb-Zn alloys with the general formula of Bi85Sb15−xAgx(x = 0, 1, 3, 5, 7) and Bi8... more Bi-Sb-Ag and Bi-Sb-Zn alloys with the general formula of Bi85Sb15−xAgx(x = 0, 1, 3, 5, 7) and Bi85Sb15−xZnx(x = 1, 3, 5, 7), respectively, were prepared by mechanical alloying and subsequent pressure-less sintering. The phase structures of the samples were investigated by X-ray diffraction. Thermoelectric properties were investigated by measuring electrical conductivity, Seebeck coefficient and thermal conductivity in the temperature range of 80–300 K. The results show that the figure-of-merit of sample Bi85Sb14Ag1 reach a maximum value of 2.16×10−3 K−1 at 219 K, which is twice as large as that of the reference sample Bi85Sb15. The value of 1.58×10−3 K−1 for figure-of-merit was obtained in the sample Bi85Sb14Zn1 at 155 K, which is about 78 percent larger than that of the reference sample Bi85Sb15 at the same temperature. The maximum figure-of-merit value is obviously shifted towards lower temperature region.
Theory and Decision, 2014
This paper weakens the expectation dependence concept due to and its higher-order extensions prop... more This paper weakens the expectation dependence concept due to and its higher-order extensions proposed by Li (2011) to conform with the preferences generating the almost stochastic dominance rules introduced in Leshno and Levy . A new dependence concept, called excess dependence is introduced, and studied in addition to expectation dependence. This new concept coincides with expectation dependence at first-degree but provides distinct higher-order extensions. Three applications, to portfolio diversification, to the determination of the sign of the equity premium in the consumption-based CAPM and to optimal investment in the presence of a background risk, illustrate the usefulness of the approach proposed in the present paper.
Economic Theory, 2014
Your article is protected by copyright and all rights are held exclusively by Springer-Verlag Ber... more Your article is protected by copyright and all rights are held exclusively by Springer-Verlag Berlin Heidelberg. This e-offprint is for personal use only and shall not be selfarchived in electronic repositories. If you wish to self-archive your article, please use the accepted manuscript version for posting on your own website. You may further deposit the accepted manuscript version in any repository, provided it is only made publicly available 12 months after official publication or later and provided acknowledgement is given to the original source of publication and a link is inserted to the published article on Springer's website. The link must be accompanied by the following text: "The final publication is available at link.springer.com".
Operations Research, 2015
Geneva Risk and Insurance Review, 2006
This paper discusses optimal insurance contract for irreplaceable commodities. To describe the du... more This paper discusses optimal insurance contract for irreplaceable commodities. To describe the dual impacts on individuals when a loss occurs to the insured irreplaceable commodities, we use a state-dependent and bivariate utility function, which includes both the monetary wealth and sentimental value as two arguments. We show that over (full, partial) insurance is optimal when a decrease in sentimental value will increase (not change, decrease, respectively) the marginal utility of monetary wealth. Moreover, a non-zero deductible exists even without administration costs. Furthermore, we demonstrate that a positive fixed reimbursement is optimal if (1) the premium is actuarially fair, (2) the monetary loss is a constant, and (3) the utility function is additively separable and the marginal utility of money is higher in the loss state than in the no-loss state. We also characterize comparative statics of fixed-reimbursement insurance under an additively separable preference assumption.
This paper analyses the welfare eect of a tax deduction system for personal losses when individua... more This paper analyses the welfare eect of a tax deduction system for personal losses when individuals consider anticipated regret in their decision making process. Under expected utility theory, Kaplow (1992) showed that providing such tax deductions partially crowds out the demand for private insurance and reduces welfare. While we con…rm the crowd out eect under regret preferences, providing tax deduction
SSRN Electronic Journal, 2000
The "annuity puzzle," which describes the inconsistency between the theoretical prediction of ful... more The "annuity puzzle," which describes the inconsistency between the theoretical prediction of full annuitization and the low rate of annuitization in reality has recently been widely discussed in the literature. In this paper, we propose that anticipatory anxiety is one of the rationales for the annuity puzzle. By setting up a two-period model under anticipatory anxiety, which is a decreasing function of the average of future consumption and an increasing function of the riskiness of future consumption as modeled by Caplin and Leahy , we find that the optimal conditions for partial annuitization as well as the optimal annuitization level are sensitive to the degree of anxiety. If purchasing annuities can reduce the disutility from anxiety, then the individual will decrease the investment in the annuity when his/her degree of anxiety increases. Moreover, given reasonable parameters, our simulation results show that anxiety can explain why individuals annuitize their income at a relatively low level.
This paper shows that providing tax deductions for individuals&am... more This paper shows that providing tax deductions for individuals' net losses could be optimal for the government when (1) the government's aggregated utility function is more risk-averse than that of the representative individual, or (2) the insured is overly optimistic with regard to the loss probability. The results of this paper could be further applied to explain why a government
- indicated that individuals with a higher degree of risk aversion would demand more insuranc... more 2001) indicated that individuals with a higher degree of risk aversion would demand more insurance and invest in self-protection to reduce risk probability when both the preference type and investment in self-protection are hidden from insurers. They referred to the negative correlation between market insurance and risk type as advantageous selection. However, the relationship between risk type and the degree of risk aversion is debatable in both theoretical and empirical research. This paper therefore proposes that advantageous selection could be supported from another angle by directly examining the relationships that exist among market insurance, selfprotection, and risk probability. By focusing on the commercial fire insurance market, information on the purchase of market insurance, investment in self-protection, and fire accident records is hand-collected by means of a unique survey. It is found that firms purchasing market insurance have a greater tendency to channel efforts into selfprotection. It is also found that firms expending effort on self-protection are less likely to suffer a fire accident. Furthermore, it is found that firms with commercial fire insurance have less chance of suffering a fire accident than those without such insurance. Each of the above three findings jointly supports the view that advantageous selection could play a critical role in the commercial fire insurance market.
Geneva Risk and Insurance Review, 2010
Theories of adverse selection and moral hazard predict the occurrence of the risk and the coverag... more Theories of adverse selection and moral hazard predict the occurrence of the risk and the coverage of the insurance should be positively correlated, whereas empirical researches find little support of it. This paper provides a theoretical model of hidden overconfidence and demonstrates that a competitive insurance market may settle on separating equilibrium with advantageous selection predicting a negative relationship between
Geneva Risk and Insurance Review, 2007
Using the representative agent approach as in Kaplow (Am Econ Rev 82:1013-1017, this paper shows ... more Using the representative agent approach as in Kaplow (Am Econ Rev 82:1013-1017, this paper shows that providing tax deductions for the individual's net losses is socially optimal when the insurer faces the risk of insolvency. We further show that the government should adopt a higher tax deduction rate for net losses when the insurer is insolvent than when the insurer is solvent. Thus, tax deductions for net losses could be used to provide an insurance for individuals against the insurer's risk of insolvency. These findings could also be used to explain why a government provides supplementary public insurance or government relief. Finally, we discuss that, if the individuals are heterogeneous in terms of loss severity, loss probability, or income level, providing a tax deduction for the individual's net losses may not always achieve a Pareto improvement, and cross subsidization should be taken into consideration.
When decision makers invest in effort to reach their targets, they face multiple sources of risk:... more When decision makers invest in effort to reach their targets, they face multiple sources of risk: first the risk of failure and second the noise that surrounds either the target or the initial situation. In this paper, we examine how effort is adjusted to account for changes in this risky environment.
While the concept of precautionary saving is well documented, that of precautionary e¤ort has rec... more While the concept of precautionary saving is well documented, that of precautionary e¤ort has received relatively limited attention. In this note, we set up a two period model in order to analyze the conditions under which the introduction (or deterioration) of an independent background risk increases e¤ort.
This paper seeks to determine whether governments should intervene in the private annuity market ... more This paper seeks to determine whether governments should intervene in the private annuity market by directly providing public insurance in the form of annuities when both the government and the insurance companies could default. It is found that, although the government could default, intervening by means of an annuity can improve social welfare if the insurance companies could default and the expected return on the public annuity is greater than the rate of return on a risk-free bond. We also find that, under actuarially fair pricing, the government should provide more in terms of a public annuity than the optimal amount of the annuity that the individual purchases in the private market if the government is less likely to default on the public annuity than an insurance company would in the case of a private annuity.
This paper studies the optimal insurance contract under disappointment theory. We show that, when... more This paper studies the optimal insurance contract under disappointment theory. We show that, when the individuals anticipate disappointment, there are two types of optimal insurance contract. The first type contains a deductible and a coinsurance above the deductible. We find that zero marginal cost is just a sufficient but not a necessary condition for a zero deductible. The second type has no deductible and the optimal insurance starts with full coverage for small losses and includes a coinsurance above an upper value of the full coverage.
This paper proposes that vehicle maintenance is one of the factors affecting the probability of a... more This paper proposes that vehicle maintenance is one of the factors affecting the probability of automobile accidents. To test the hypothesis, we use a unique data set which is merged from an insurance company and a vehicle manufacturer in Taiwan. The total number of observations in our final sample is 155,116. We find that proper maintenance defined by the recommended kilometers is significantly negatively correlated with loss probability in compulsory automobile liability insurance. On average, maintenance will decrease the loss probability by between 0.165% and 0.261% according to different proxies for proper maintenance, whereas the average loss probability for the overall sample is 0.93%. We further find that proper maintenance is insignificantly correlated with loss severity. JEL classification: G22, C12, D01 Recently, Brockett and Golden (2007) provide a detailed survey of the related literature and classify the risk factors to biological, psychological and behavioral characteristics. More importantly, they hypothesize that the reason that credit scoring works in underwriting automobile insurance is that there is an underlying biological and/or psychological and social component of each individual which regulates their risk taking behavior, and, since this propensity is individual and intrinsic, it spans risk 1 The data are obtained from the U.S. Census Bureau, Statistical Abstract of the United States: 2010, .
This paper investigates the relationship between mortality rates and the equity premium. We propo... more This paper investigates the relationship between mortality rates and the equity premium. We propose that the improvement in the risk perception of mortality rates could increase the anxiety from holding risky assets and further change the demand for them.
We examine insurance markets in which there are two types of customers: those who regret suboptim... more We examine insurance markets in which there are two types of customers: those who regret suboptimal decisions and those who don't. In this setting, we characterize the equilibria under hidden information about the type of customers and hidden action. We show that both pooling and separating equilibria can exist. Furthermore, there exist separating equilibria that predict a positive correlation between the amount of insurance coverage and risk type, as in the standard economic models of adverse selection, but there also exist separating equilibria that predict a negative correlation between the amount of insurance coverage and risk type, i.e. advantageous selection.
Bi-Sb-Ag and Bi-Sb-Zn alloys with the general formula of Bi85Sb15−xAgx(x = 0, 1, 3, 5, 7) and Bi8... more Bi-Sb-Ag and Bi-Sb-Zn alloys with the general formula of Bi85Sb15−xAgx(x = 0, 1, 3, 5, 7) and Bi85Sb15−xZnx(x = 1, 3, 5, 7), respectively, were prepared by mechanical alloying and subsequent pressure-less sintering. The phase structures of the samples were investigated by X-ray diffraction. Thermoelectric properties were investigated by measuring electrical conductivity, Seebeck coefficient and thermal conductivity in the temperature range of 80–300 K. The results show that the figure-of-merit of sample Bi85Sb14Ag1 reach a maximum value of 2.16×10−3 K−1 at 219 K, which is twice as large as that of the reference sample Bi85Sb15. The value of 1.58×10−3 K−1 for figure-of-merit was obtained in the sample Bi85Sb14Zn1 at 155 K, which is about 78 percent larger than that of the reference sample Bi85Sb15 at the same temperature. The maximum figure-of-merit value is obviously shifted towards lower temperature region.