Contract nonperformance risk and uncertainty in insurance markets

Christian Biener, Andreas Landmann and Maria Isabel Santana

Journal of Public Economics, 2019, vol. 175, issue C, 65-83

Abstract: Insurance contracts may fail to perform, leading to a default on valid claims. We relax the standard assumption of known probabilities for such defaults by allowing for uncertainty. Within a large behavioral experiment, we show that introducing risk and uncertainty each leads to significant reductions in insurance demand and that the effects are comparable in magnitude (17.1 and 14.5 percentage points). Furthermore, risk- and ambiguity-averse participants are affected most. These findings are in line with models incorporating ambiguity attitudes or, alternatively, pessimistic beliefs. An analysis of the belief and decision dynamics suggests persistent pessimistic priors and disregard of peer experiences, leading to a stable uncertainty effect.

Keywords: Uncertainty; Ambiguity preferences; Pessimistic beliefs; Contract nonperformance; Insurance (search for similar items in EconPapers)
JEL-codes: D03 D81 D83 G22 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:175:y:2019:i:c:p:65-83

DOI: 10.1016/j.jpubeco.2019.05.001

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