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Background Uuncertainty and the Demand for Insurance against Insurable Risks

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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 characterised by decreasing absolute prudence

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 02.

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Date of creation: 01 Apr 1998
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Publication status: Published in The Geneva Papers on Risk and Insurance Theory, May 1998, vol. 23, pages 7-27
Handle: RePEc:sef:csefwp:02

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Keywords: Insurance; background risk; prudence;

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  1. Darrell Duffie & Thaleia Zariphopoulou, 1993. "Optimal Investment With Undiversifiable Income Risk," Mathematical Finance, Wiley Blackwell, vol. 3(2), pages 135-148.
  2. Jeff Dominitz & Charles F. Manski, 1994. "Using Expectations Data to Study Subjective Income Expectations," Econometrics 9411003, EconWPA.
  3. Giucca, P. & Jappelli, T. & Terlizzese, D., 1992. "Earning Uncertainty and Precautionary Saving," Papers 161, Banca Italia - Servizio di Studi.
  4. Miles S. Kimball, 1991. "Standard Risk Aversion," NBER Technical Working Papers 0099, National Bureau of Economic Research, Inc.
  5. Douglas W. Elmendorf & Miles S. Kimball, 1996. "Taxation of labor income and the demand for risky assets," Finance and Economics Discussion Series 96-32, Board of Governors of the Federal Reserve System (U.S.).
  6. Dionne, G. & Gollier, C., 1991. "Comparative Statics Under Multiple Sources of Risk with Appllications to Insurance Demand," Cahiers de recherche 9133, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  7. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  8. Anne Gron & Deborah Lucas, 1995. "External Financing and Insurance Cycles," NBER Working Papers 5229, National Bureau of Economic Research, Inc.
  9. Gruber, Jonathan & Poterba, James, 1994. "Tax Incentives and the Decision to Purchase Health Insurance: Evidence from the Self-Employed," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 701-33, August.
  10. 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.
  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. Miles S. Kimball, 1991. "Precautionary Motives for Holding Assets," NBER Working Papers 3586, National Bureau of Economic Research, Inc.
  13. 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.
  14. 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.
  15. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-72, March.
  16. Skinner, Jonathan, 1988. "Risky income, life cycle consumption, and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 237-255, September.
  17. 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-.
  18. EECKHOUDT, Louis & Christian GOLLIER & Harris SCHLESINGER, 1994. "Changes in Background Risk and Risk Taking Behavior," Working Papers 005, Risk and Insurance Archive.
  19. 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.
  20. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
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Cited by:
  1. Grande, Giuseppe & Ventura, Luigi, 2002. "Labor income and risky assets under market incompleteness: Evidence from Italian data," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 597-620, March.
  2. Marc-Andre Letendre & Gregor Smith, 2000. "Precautionary saving and portfolio allocation: DP by GMM," Working Papers 1247, Queen's University, Department of Economics.
  3. Thomas Eichner & Andreas Wagener, 2002. "Increases in Risk and the Welfare State," CESifo Working Paper Series 685, CESifo Group Munich.
  4. 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).
  5. Craig E. Landry & Mohammad R. Jahan‐Parvar, 2011. "Flood Insurance Coverage in the Coastal Zone," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 78(2), pages 361-388, 06.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. Monica Paiella & Luigi Guiso, 2004. "Risk Aversion, Wealth and Background Risk," 2004 Meeting Papers 525, Society for Economic Dynamics.
  11. Elisa Cavatorta & Luca Pieroni, 2013. "Background Risk of Food Insecurity and Insurance Behaviour: Evidence from the West Bank," Working Paper Series 06_13, The Rimini Centre for Economic Analysis.
  12. Elisa Cavatorta, 2010. "A competing risk model for health and food insecurity in the West Bank," Birkbeck Working Papers in Economics and Finance 1013, Birkbeck, Department of Economics, Mathematics & Statistics.

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