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Prudence, risk aversion, and the demand for life insurance

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  • Joseph Eisenhauer
  • Martin Halek
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    Abstract

    We estimate the effect of household wealth on the demand for life insurance using survey data from a broad cross-section of the USA. This procedure allows us to test the Pratt-Arrow hypothesis of decreasing absolute risk aversion (DARA). Additionally, we estimate the relative magnitude of prudence, the propensity to take precautions when faced with risk. We find that life insurance purchases increase with wealth, and that on average American households exhibit about 94 per cent as much prudence as risk aversion. On the basis of this evidence, we reject the DARA hypothesis.

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    File URL: http://www.informaworld.com/openurl?genre=article&doi=10.1080/135048599353429&magic=repec&7C&7C8674ECAB8BB840C6AD35DC6213A474B5
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

    Volume (Year): 6 (1999)
    Issue (Month): 4 ()
    Pages: 239-242

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    Handle: RePEc:taf:apeclt:v:6:y:1999:i:4:p:239-242

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    Cited by:
    1. Eling, Martin & Pradhan, Shailee & Schmit, Joan T., 2013. "The Determinants of Microinsurance Demand," Working Papers on Finance 1308, University of St. Gallen, School of Finance.
    2. repec:ebl:ecbull:v:4:y:2003:i:38:p:1-10 is not listed on IDEAS
    3. Menhart, Michael & Rennhak, Carsten, 2006. "Drivers of the lifecycle: the example of the German insurance industry," Reutlingen Working Papers on Marketing & Management 2006-03, Reutlingen University, ESB Business School.
    4. David Love, 2008. "The Effect of Marital Status and Children on Savings and Portfolio Choice," Department of Economics Working Papers 2008-13, Department of Economics, Williams College.

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