 Is insurance normal or inferior? -A regret theoretical approach-Yoichiro Fujii, Mahito Okura and Yusuke Osaki The North American Journal of Economics and Finance, 2021, vol. 58, issue C Abstract: This study considers how changes in wealth affect insurance demand when individuals suffer disutility from regret. Anticipated regret stems from a comparison between the ex-post maximum and actual wealth. We consider a situation wherein individuals maximize their expected utility incorporating anticipated regret. The wealth effect on insurance demand can be classified into the risk and the regret effects. These effects are determined by the properties of the utility function and the regret function. We show that insurance can be normal when individuals place weight on anticipated regret, even though the utility function exhibit decreasing absolute risk aversion. This result indicates that regret theory is a possible explanation to the wealth effect puzzle, in which insurance is normal from empirical observation, but it should be inferior by theoretical prediction under expected utility theory. Keywords: Decreasing absolute risk aversion; Demand shift; Regret sensitivity; Wealth effect puzzle (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821001674 DOI: 10.1016/j.najef.2021.101559 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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