Economics of Risk and Insurance

The course intends to provide students with the basic knowledge that is needed to deal with insurance markets and household finance problems.

The student should come to understand risk, uncertainty, insurance and the role of financial markets in a modern economy. She/he should also be able to understand the basic concepts and methods for the design of financial portfolios under uncertainty.

Basic microeconomic theory and decision theory, accounting rules and procedures, calculus and basic mathematical analysis.

The first part of the course focuses on the economics of insurance and insurance markets, discussing the economic foundations of insurance decisions in different contexts. This part of the course will be devoted to the standard model, where individuals maximize expected life-time utility subject to a number of constraints. Adverse selection, moral hazard and more generally the role of (asymmetric) information will be analyzed to understand their effects on insurance markets and the different types of insurance contracts. Annuity and pension contracts are discussed in this section but further investigated in the second part.

The second part of the course will focus on household finance: we study how households actually invest their savings and how they should do it according to economic theory. Relevant issues, here, are those related to participation in financial markets, portfolio diversification and intertemporal consumption/saving decision. We will also focus on specific aspects of household financing: housing and mortgage decisions, consumer credit, and investment in private pensions.

A brief discussion of the approach labelled “behavioral finance” will also be presented, looking at descriptive models for decision making under risk. Prospect theory and the concepts of loss aversion, probability distortion and mental accounting will be presented should time allow us to do it.

Christian Gollier (1999), The Economics of Risk and Time, MIT Press
Downloadable at : https://microeconomiaavanzada210.files.wordpress.com/2012/04/the-economics-of-risk-and-time-gollier.pdf

Dean Corbae, Lecture Notes: https://sites.google.com/a/wisc.edu/deancorbae/teaching

Ken Kasa, Lecture Notes: http://www.sfu.ca/~kkasa/econ815.html

Written exam containing theorical questions and/or requiring to comment some empirical application.

Each meeting will be dedicated to a specific topic or issue. The first half of the meeting will be dedicated to “teaching the topic” and the second half to “discussing the topic”. It is required that attending students do some reading before each meeting that will be assigned with specific suggestions in due time.

Students will find three suggested references ad the end of this syllabus and that’s a lot of material. They are all downloadable from the Web for free and you should look at them. The one strictly required is the first one, by Christian Gollier: it contains abundant materials I will use in class. The other two are more advanced and may use a few lectures or references from them, as needed. I will also be mailing you additional reading materials week by week, depending on how fast we proceed.

There will be a number of homework, aimed at making you familiar with empirical applications of the models studied in class.

Italian

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