An optimal insurance contract against a climatic risk is derived in the presence of an uninsurable and dependent aggregate production risk. The optimaldesign depends on the stochastic dependency between both sources of uncertainty and on the producer's attitude towards risk, especially on his prudent behavior. Rationalweather insurance purchasing decisions are also derived. The prudent producer responds to actuarially fair weather insurance by increasing his exposure towards risk.
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Olivier Mahul (2001) studied this question.
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