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Background Uncertainty and the Demand for Insurance Against Insurable Risks

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  • Luigi Guiso

    ()
    (CEPR and Ente “Luigi Einaudi” per gli Studi Monetari, Bancari e Finanziari, Via Due Macelli, University of Sassari, 73-00187 Rome, Italy.)

  • Tullio Jappelli

    ()
    (Dipartimento di Scienze Economiche, University of Salerno, 84084 Fisciano, Salerno, Italy and CEPR.)

Abstract

Theory suggests that people facing higher uninsurable background risk buy more insurance against other risks that are insurable. This proposition is supported by Italian cross-sectional data. It is shown that the probability of purchasing casualty insurance increases with earnings uncertainty. This finding is consistent with consumer preferences being characterized by decreasing absolute prudence. The Geneva Papers on Risk and Insurance Theory (1998) 23, 7–27. doi:10.1023/A:1008621712979

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 23 (1998)
Issue (Month): 1 (June)
Pages: 7-27

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Handle: RePEc:pal:genrir:v:23:y:1998:i:1:p:7-27

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References

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  1. Anne Gron & Deborah J. Lucas, 1998. "External Financing and Insurance Cycles," NBER Chapters, in: The Economics of Property-Casualty Insurance, pages 5-28 National Bureau of Economic Research, Inc.
  2. Giucca, P. & Jappelli, T. & Terlizzese, D., 1992. "Earning Uncertainty and Precautionary Saving," Papers 161, Banca Italia - Servizio di Studi.
  3. EECKHOUDT, Louis & Christian GOLLIER & Harris SCHLESINGER, 1994. "Changes in Background Risk and Risk Taking Behavior," Working Papers 005, Risk and Insurance Archive.
  4. Miles S. Kimball, 1991. "Standard Risk Aversion," NBER Technical Working Papers 0099, National Bureau of Economic Research, Inc.
  5. Gruber, J. & Poterba, J., 1994. "Tax Incentives and the Decision to Purchase Health Insurance: Evidence from the Self-Employed," Working papers 94-10, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers.
  7. Dionne, G. & Gollier, C., 1991. "Comparative Statics Under Multiple Sources of Risk with Appllications to Insurance Demand," Cahiers de recherche 9133, Universite de Montreal, Departement de sciences economiques.
  8. Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-23, September.
  9. Skinner, Jonathan, 1988. "Risky income, life cycle consumption, and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 237-255, September.
  10. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
  11. Lewis, Frank D, 1989. "Dependents and the Demand for Life Insurance," American Economic Review, American Economic Association, vol. 79(3), pages 452-67, June.
  12. Jeff Dominitz & Charles F. Manski, 1994. "Using Expectations Data to Study Subjective Income Expectations," Econometrics 9411003, EconWPA.
  13. Darrell Duffie & Thaleia Zariphopoulou, 1993. "Optimal Investment With Undiversifiable Income Risk," Mathematical Finance, Wiley Blackwell, vol. 3(2), pages 135-148.
  14. Doherty, Neil A & Schlesinger, Harris, 1983. "The Optimal Deductible for an Insurance Policy When Initial Wealth Is Random," The Journal of Business, University of Chicago Press, vol. 56(4), pages 555-65, October.
  15. Miles S. Kimball, 1991. "Precautionary Motives for Holding Assets," NBER Working Papers 3586, National Bureau of Economic Research, Inc.
  16. Mayers, David & Smith, Clifford W, Jr, 1983. "The Interdependence of Individual Portfolio Decisions and the Demand for Insurance," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 304-11, April.
  17. Doherty, Neil A & Schlesinger, Harris, 1983. "Optimal Insurance in Incomplete Markets," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 1045-54, December.
  18. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  19. Douglas W. Elmendorf & Miles S. Kimball, 1991. "Taxation of Labor Income and the Demand For Risky Assets," NBER Working Papers 3904, National Bureau of Economic Research, Inc.
  20. Marti G. Subrahmanyam & Günter Franke & Richard C. Stapleton, 1998. "The Size of Background Risk and the Theory of Risk Bearing," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-066, New York University, Leonard N. Stern School of Business-.
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Citations

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Cited by:
  1. Koeniger, Winfried, 2001. "Labor and Financial Market Interactions: The Case of Labor Income Risk and Car Insurance in the UK 1969-95," IZA Discussion Papers 240, Institute for the Study of Labor (IZA).
  2. Landry, Craig E. & Jahan-Parvar, Mohammad R., 2008. "Flood Insurance Coverage in the Coastal Zone," MPRA Paper 15498, University Library of Munich, Germany.
  3. Giovanni Millo & Gaetano Carmeci, 2011. "Non-life insurance consumption in Italy: a sub-regional panel data analysis," Journal of Geographical Systems, Springer, vol. 13(3), pages 273-298, September.
  4. Cavatorta, Elisa & Pieroni, Luca, 2010. "A Competing Risk Model for Health and Food Insecurity in the West Bank," MPRA Paper 25555, University Library of Munich, Germany.
  5. Luigi Guiso & Paolo Sodini, 2012. "Household Finance. An Emerging Field," EIEF Working Papers Series 1204, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2012.
  6. Luigi Guiso & Monica Paiella, 2007. "Risk Aversion, Wealth, and Background Risk," Economics Working Papers ECO2007/47, European University Institute.
  7. Thomas Eichner & Andreas Wagener, 2002. "Increases in Risk and the Welfare State," CESifo Working Paper Series 685, CESifo Group Munich.
  8. Giuseppe Grande & Luigi Ventura, 2001. "Labor Income and Risky Assets under Market Incompleteness: Evidence from Italian Data," Temi di discussione (Economic working papers) 399, Bank of Italy, Economic Research and International Relations Area.
  9. Cavatorta, Elisa & Pieroni, Luca, 2013. "Background risk of food insecurity and insurance behaviour: Evidence from the West Bank," Food Policy, Elsevier, vol. 43(C), pages 278-290.
  10. Marc-Andre Letendre & Gregor Smith, 2000. "Precautionary saving and portfolio allocation: DP by GMM," Working Papers 1247, Queen's University, Department of Economics.
  11. Luc Arrondel & André Masson & Daniel Verger, 2005. "Measuring Individual Risk-Related Preferences," Economie et Statistique, Institut National de la Statistique et des Etudes Economiques, vol. 374, pages 53-85, May.
  12. Eichner, Thomas & Wagener, Andreas, 2012. "Tempering effects of (dependent) background risks: A mean-variance analysis of portfolio selection," Journal of Mathematical Economics, Elsevier, vol. 48(6), pages 422-430.

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