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Risk Preference Heterogeneity And Multiple Demand For Insurance

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  • LI DONNI, P.;

Abstract

We examined the relationship between unobserved risk preferences and four insurance purchase decisions: health Medigap insurance, long-term insurance, life insurance and annuity. Standard economic theory assumes that individuals take decision over a set of risky domains according to their own risk preferences which are stable across decision contexts. This assumption of context-invariant risk preference has caused debate in the literature concerning its validity. Using data from the Health and Retirement Study, we exploit latent class analysis to identify conditional on predicted and realized risk how heterogeneity in risk preferences affects multiple insurance demand. Our results provide evidence of the existence of domain general component of risk preferences, although non-preference factors - such as context specificity - play also an important role. JEL Classi_cation Numbers G11, Keywords

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Paper provided by HEDG, c/o Department of Economics, University of York in its series Health, Econometrics and Data Group (HEDG) Working Papers with number 10/17.

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Date of creation: Jul 2010
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Handle: RePEc:yor:hectdg:10/17

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Web page: http://www.york.ac.uk/economics/postgrad/herc/hedg/
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Keywords: Risk Preferences; Multiple Demand for Insurance; Finite Mixture Model; Long-Term Care Insurance; Medigap; Annuity; Life Insurance;

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  1. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, 04.
  2. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
  3. John C. Hershey & Howard C. Kunreuther & Paul J. H. Schoemaker, 1982. "Sources of Bias in Assessment Procedures for Utility Functions," Management Science, INFORMS, vol. 28(8), pages 936-954, August.
  4. Miles S. Kimball & Claudia R. Sahm & Matthew D. Shapiro, 2007. "Imputing Risk Tolerance from Survey Responses," NBER Working Papers 13337, National Bureau of Economic Research, Inc.
  5. Liran Einav & Amy Finkelstein & Jonathan Levin, 2009. "Beyond Testing: Empirical Models of Insurance Markets," NBER Working Papers 15241, National Bureau of Economic Research, Inc.
  6. John Cawley & Tomas Philipson, 1996. "An Empirical Examination of Information Barriers to Trade in Insurance," NBER Working Papers 5669, National Bureau of Economic Research, Inc.
  7. Francesco Bartolucci & Antonio Forcina, 2005. "Likelihood inference on the underlying structure of IRT models," Psychometrika, Springer, vol. 70(1), pages 31-43, March.
  8. Bruno Jullien & Bernard Salanie, 2000. "Estimating Preferences under Risk: The Case of Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 503-530, June.
  9. Guiso, Luigi & Paiella, Monica, 2004. "The Role of Risk Aversion in Predicting Individual Behaviours," CEPR Discussion Papers 4591, C.E.P.R. Discussion Papers.
  10. Ettner, Susan L., 1997. "Adverse selection and the purchase of Medigap insurance by the elderly," Journal of Health Economics, Elsevier, vol. 16(5), pages 543-562, October.
  11. Alma Cohen & Liran Einav, 2005. "Estimating Risk Preferences from Deductible Choice," Discussion Papers 04-031, Stanford Institute for Economic Policy Research.
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