Uncertainty and the Demand for Insurance

Amit Gandhi, Anya Samek and Ricardo Serrano-Padial
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Amit Gandhi: University of Pennsylvania & Abnb

No 2021-3, School of Economics Working Paper Series from LeBow College of Business, Drexel University

Abstract: We survey a representative sample of US households to evaluate the impact of uncertainty about underlying risks on insurance demand. We find that uncertainty increases demand, individuals switch from risk averse to risk loving as risks become larger, and risk and uncertainty aversion are negatively correlated. We propose uncertainty preferences exhibiting probability weighing that can explain our data. We estimate the distribution of preferences in the population and find substantial heterogeneity and overweighing (underweighting) of small (large) probabilities. Our work highlights the need to account for uncertainty in insurance markets and suggests ways to do so even with limited data.

Keywords: risk; uncertainty; ambiguity; insurance; compound risk; probability weighting; incentivized survey (search for similar items in EconPapers)
JEL-codes: D12 D14 D81 G22 J33 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2021-01-11, Revised 2021-12-17
New Economics Papers: this item is included in nep-exp, nep-ias and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:ris:drxlwp:2021_003

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