Choice Involving Unwanted Risky Events and Optimal Insurance: Comment
Abstract
In a recent paper in this Review, J. M. Parkin and S. Y. Wu (P-W) analyzed the demand for insurance in a model with two uncertain states of the world, A and B. They assumed that an unwanted event (say, illness) occurs in state B and they also permit the individual's conditional utility function to vary across these states. The purpose of this note is to show that while their mathematical statement of the problem was formally correct, their interpretation of results was erroneous. I shall briefly state a more accurate interpretation of their model's implications.
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