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Buying Insurance for Disaster-Type Risks: Experimental Evidence

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  • Philip Ganderton

    ()

  • David Brookshire

    ()

  • Michael McKee

    ()

  • Steve Stewart

    ()

  • Hale Thurston

    ()

Abstract

This paper presents a series of experiments that confront subjects with low probability, high loss situations. A rich parameter set is examined and we find subjects respond to low probability, high loss risks in predictable ways. As loss events become more likely, or loss amounts get larger, or the cost of insurance falls, subjects are more likely to buy indemnifying insurance, even for the class of low probability risks that usually presents problems for standard expected utility theory. A novel application of Cameron's method to estimate willingness to pay from dichotomous choice responses allows us to estimate willingness to pay for insurance. We do not observe the bimodal distribution of bids found in other studies of similar risk situations. Copyright Kluwer Academic Publishers 2000

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File URL: http://hdl.handle.net/10.1023/A:1007871514658
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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 20 (2000)
Issue (Month): 3 (May)
Pages: 271-289

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Handle: RePEc:kap:jrisku:v:20:y:2000:i:3:p:271-289

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Web page: http://www.springerlink.com/link.asp?id=100299

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Keywords: experiments; risk; insurance;

References

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  1. Kunreuther, Howard, 1996. "Mitigating Disaster Losses through Insurance," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 171-87, May.
  2. McClelland, Gary H & Schulze, William D & Coursey, Don L, 1993. " Insurance for Low-Probability Hazards: A Bimodal Response to Unlikely Events," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 95-116, August.
  3. Camerer, Colin & Kunreuther, Howard, 1993. " Making Decisions about Liability and Insurance: Editors' Comments," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 5-15, August.
  4. Charles T. Clotfelter & Philip J. Cook, 1991. "The "Gambler's Fallacy" in Lottery Play," NBER Working Papers 3769, National Bureau of Economic Research, Inc.
  5. Cameron, Trudy Ann, 1988. "A new paradigm for valuing non-market goods using referendum data: Maximum likelihood estimation by censored logistic regression," Journal of Environmental Economics and Management, Elsevier, vol. 15(3), pages 355-379, September.
  6. Viscusi, W Kip, 1990. "Do Smokers Underestimate Risks?," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1253-69, December.
  7. Colin F. Camerer & Howard Kunreuther, 1989. "Decision processes for low probability events: Policy implications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 565-592.
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