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Willingness to Overpay for Insurance and for Consumer Credit: Search and Risk Behavior Under Price Dispersion

Listed author(s):
  • Sergey MALAKHOV

    (Pierre-Mend├Ęs-France University, France)

When income growth under price dispersion reduces the time of search and raises prices of purchases, the increase in purchase price can be presented as the increase in the willingness to pay for insurance or the willingness to pay for consumer credit. The optimal consumer decision represents the trade-off between the propensity to search for beneficial insurance or consumer credit, and marginal savings on insurance policy or consumer credit. Under price dispersion the indirect utility function takes the form of cubic parabola, where the risk aversion behavior ends at the saddle point of the comprehensive insurance or the complete consumer credit. The comparative static analysis of the saddle point of the utility function discovers the ambiguity of the departure from risk-neutrality. This ambiguity can produce the ordinary risk seeking behavior as well as mathematical catastrophes of Veblen-effect's imprudence and over prudence of family altruism. The comeback to risk aversion is also ambiguous and it results either in increasing or in decreasing relative risk aversion. The paper argues that the decreasing relative risk aversion comes to the optimum quantity of money.

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Article provided by Sprint Investify in its journal Expert Journal of Economics.

Volume (Year): 2 (2014)
Issue (Month): 3 ()
Pages: 109-119

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Handle: RePEc:exp:econcs:v:2:y:2014:i:3:p:109-119
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  1. Mehrling, Perry, 1995. "A note on the optimum quantity of money," Journal of Mathematical Economics, Elsevier, vol. 24(3), pages 249-258.
  2. Malakhov, Sergey, 2012. "Satisficing decision procedure and optimal consumption-leisure choice," MPRA Paper 38964, University Library of Munich, Germany.
  3. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  4. Alessandra Guariglia & Mariacristina Rossi, 2003. "Private Medical Insurance and Saving: Evidence from the British Household Panel Survey," CEIS Research Paper 39, Tor Vergata University, CEIS.
  5. Malakhov, Sergey, 2014. "Consumer search behavior and willingness to pay for insurance under price dispersion," MPRA Paper 59530, University Library of Munich, Germany.
  6. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213-213.
  7. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-648, July-Aug..
  8. Malakhov, Sergey, 2013. "Money flexibility and optimal consumption-leisure choice under price dispersion," MPRA Paper 45197, University Library of Munich, Germany.
  9. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-399, April.
  10. Sergey MALAKHOV, 2014. "Willingness to Overpay for Insurance and for Consumer Credit: Search and Risk Behavior Under Price Dispersion," Expert Journal of Economics, Sprint Investify, vol. 2(3), pages 109-119.
  11. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
  12. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-1504, September.
  13. Becker, Gary S, 1981. "Altruism in the Family and Selfishness in the Market Place," Economica, London School of Economics and Political Science, vol. 48(189), pages 1-15, February.
  14. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
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