Insurance demand, the elasticity of risk aversion, and relative prudence: a further result

Abstract.

Battermann et al. (2002) find that, within the mean-variance framework, the magnitude of the elasticity of risk aversion with respect to the standard deviation of wealth determines the comparative static effect of an increase in an insurable risk on insurance demand. We relate this finding to preference characteristics and results known from the expected-utility framework. In particular, we show that the elasticity condition in Battermann et al. (2002) is equivalent to the condition on relative prudence that governs comparative static effects for mean-preserving contractions in the expected-utility framework.