ECON 138 Risk and Insurance

The nature of economic risk, its effect on allocation of resources and its public policy implications. Preferences among risky prospects: expected utility theory and the theory of risk aversion. Allocation of risk using markets for contingent claims vs. insurance pools in economies with complete information. The functioning of insurance markets when information is asymmetric, under moral hazard and adverse selection. Can insurance markets function well in a competitive equilibrium? Role of asset markets in allocating risk. How some risks coprporations face are associated with price fluctuations and can be hedged in financial markets. Hedging strategies using futures markets, options and other derivative assets. Associated with the study of insurance markets, the role of risk taking in financial crises and how do insurance markets perform in such conditions. Prerequisite: 50.

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