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(Over)insuring Modest Risks

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  • Justin Sydnor
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    Abstract

    Despite the large literature on anomalies in risky choice, very little research has explored the relevance of these insights in real insurance markets. This paper uses new data on consumers' choices of deductibles for home insurance to provide evidence that a surprising level of risk aversion over modest stakes is a reality in the market. Most customers purchase low deductibles despite costs significantly above the expected value. Fitting these choices to a standard model of risk aversion yields implausibly large measures of risk parameters. Potential explanations and the implications of these results for understanding the market for insurance are discussed. (JEL D14, D81, G21, G22)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/app.2.4.177
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    File URL: http://www.aeaweb.org/aej/app/data/2009-0248_data.zip
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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Journal: Applied Economics.

    Volume (Year): 2 (2010)
    Issue (Month): 4 (October)
    Pages: 177-99

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    Handle: RePEc:aea:aejapp:v:2:y:2010:i:4:p:177-99

    Note: DOI: 10.1257/app.2.4.177
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    References

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    1. Cicchetti, Charles J & Dubin, Jeffrey A, 1994. "A Microeconometric Analysis of Risk Aversion and the Decision to Self-Insure," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 169-86, February.
    2. Alma Cohen & Liran Einav, 2005. "Estimating Risk Preferences from Deductible Choice," NBER Working Papers 11461, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Justin Gallagher, 2014. "Learning about an Infrequent Event: Evidence from Flood Insurance Take-Up in the United States," American Economic Journal: Applied Economics, American Economic Association, vol. 6(3), pages 206-33, July.
    2. Chiappori, Pierre-André & Gandhi, Amit & Salanié, Bernard & Salanié, François, 2012. "From Aggregate Betting Data to Individual Risk Preferences," TSE Working Papers 13-453, Toulouse School of Economics (TSE).
    3. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2012. "Salience and Consumer Choice," NBER Working Papers 17947, National Bureau of Economic Research, Inc.
    4. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    5. Emel Filiz-Ozbay & Jonathan Guryan & Kyle Hyndman & Melissa Schettini Kearney & Erkut Y. Ozbay, 2013. "Do Lottery Payments Induce Savings Behavior: Evidence from the Lab," NBER Working Papers 19130, National Bureau of Economic Research, Inc.
    6. Kangoh Lee, 2012. "Uncertain indemnity and the demand for insurance," Theory and Decision, Springer, vol. 73(2), pages 249-265, August.
    7. Osberghaus, Daniel, 2013. "Prospect theory, mitigation and adaptation to climate change," ZEW Discussion Papers 13-091, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    8. Johannes Spinnewijn, 2012. "Heterogeneity, Demand for Insurance and Adverse Selection," CEP Discussion Papers dp1142, Centre for Economic Performance, LSE.
    9. Pagel, Michaela, 2012. "Expectations-Based Reference-Dependent Preferences and Asset Pricing," MPRA Paper 47933, University Library of Munich, Germany.
    10. Loewenstein, George & Friedman, Joelle Y. & McGill, Barbara & Ahmad, Sarah & Linck, Suzanne & Sinkula, Stacey & Beshears, John & Choi, James J. & Kolstad, Jonathan & Laibson, David & Madrian, Brigitte, 2013. "Consumers’ misunderstanding of health insurance," Journal of Health Economics, Elsevier, vol. 32(5), pages 850-862.
    11. Pagel, Michaela, 2013. "Expectations-Based Reference-Dependent Life-Cycle Consumption," MPRA Paper 47138, University Library of Munich, Germany.
    12. Xiaodong Du & Hongli Feng & David A. Hennessy, 2014. "Rationality of Choices in Subsidized Crop Insurance Markets," Center for Agricultural and Rural Development (CARD) Publications 14-wp545, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    13. Vieider, Ferdinand M. & Truong, Nghi & Martinsson, Peter & Pham Khanh Nam & Martinsson, Peter, 2013. "Risk preferences and development revisited: A field experiment in Vietnam," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2013-403, Social Science Research Center Berlin (WZB).

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