Background Risk and Insurance Take-up under Limited Liability

Gilad Sorek and Thomas Beard

No auwp2019-05, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: We study the effect of a non-insurable background risk (BGR) on insurance take-up choices over insurable risks made by risk-averse agents under limited liability laws. This economic environment applies, for example, to the consumer’s decision to purchase medical insurance in the face of non-insurable income risk under limited liability provided by bankruptcy. We consider two types of BGR - a wealth deteriorating risk and a mean-preserving risk. We show that the magnitude of both BGR types has a non-monotonic effect on the rate of uninsured consumers. This is in contrast with the standard monotonic effect of background risk on the demand for insurance, obtained for risk-averse agents under full liability.

Keywords: Insurance take-up; Bankruptcy; Background Risk (search for similar items in EconPapers)
JEL-codes: I38 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-ias, nep-ore and nep-rmg
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