Consumer search behavior and willingness to pay for insurance under price dispersion

Sergey Malakhov

MPRA Paper from University Library of Munich, Germany

Abstract: When the increase in income reduces the time of search and increases prices of purchases, the increase in price can be presented as the increase in the willingness to pay for insurance. The optimal consumer decision represents the trade-off between the propensity to search for proficient insurance and marginal savings on insurance policy. Under price dispersion the indirect utility function takes the form of cubic parabola, where the saddle point represents the comprehensive insurance. The comparative static analysis of the saddle point of the utility function discovers the ambiguity of the departure from risk-neutrality. This ambiguity can produce the ordinary risk seeking behavior as well as mathematical catastrophes of Veblen-effect’s imprudence and over prudence of family altruism. The comeback to risk aversion is also ambiguous and it results either in increasing or in decreasing relative risk aversion. The paper argues that the decreasing risk aversion results in the optimum quantity of money.

Keywords: consumer search; risk; insurance; real balances; Veblen effect; family altruism; mathematical catastrophe (search for similar items in EconPapers)
JEL-codes: D11 D81 (search for similar items in EconPapers)
Date: 2014-10-28
New Economics Papers: this item is included in nep-hea, nep-ias and nep-upt
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https://mpra.ub.uni-muenchen.de/59530/1/MPRA_paper_59530.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/60011/1/MPRA_paper_60011.pdf revised version (application/pdf)

Related works:
Working Paper: Willingness to overpay for insurance and for consumer credit: search and risk behavior under price dispersion (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:59530

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