The Optimal Level of Deductibility in Insurance Contracts

Abstract

This paper examines the choice of an insurance contract when insurance is of the deductible type. This optimal choice is shown to be directly related to the insured's degree of risk aversion. Under certain assumptions, it is shown that an individual with a higher loss probability, a higher degree of risk aversion, or a lower level of initial wealth will purchase more insurance. Conditions for the purchase of full coverage or no coverage are also examined.