Abstract
The purpose of this paper is to provide a joint treatment of the saving and insurance decisions which have very often been dealt with separately in the economic literature. In the present model any decrease in the current consumption level can be used to finance either insurance purchase or an increase in the stock of safe assets held in financial institutions (called ‘deposits’ or ‘contingency reserves fund’ for brevity).The most important result is that, under decreasing temporal risk aversion, deposits and insurance are pure substitutes in the Hicksian sense. Besides, it is shown among other comparative statics results that insurance is not necessarily an inferior good, contrarily to the prevailing view in the literature. Finally, we indicate under which conditions a separation theorem between consumption, insurance and deposits holds. These conditions are either a fair insurance premium or a constant temporal risk aversion. Finally our results are compared to related ones in the literature.
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