An economic premium principle in a multiperiod economy

This paper considers a multiperiod economic equilibrium model for deriving the economic premium principle of Buhlmann [Astin Bull. 11 (1980) 52-60; As tin Bull. 14(1983) 13-21]. To do this, we construct a consumption/portfolio model in which each agent is characterized by his/her utility function and income and seeks to invest his/her wealth in both insurance as well as a f inancial market so as to maximize the expected, discounted total utility fr om consumption. The state price density in equilibrium is obtained in terms of the Arrow-Pratt index of absolute risk aversion for the representative agent. As special cases, power and exponential utility functions are examin ed, and some comparative statics results are derived. (C) 2001 Elsevier Sci ence B.V. All rights reserved.