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Insurance demand and social comparison: An experimental analysis

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  • Andreas Friedl
  • Katharina Lima de Miranda
  • Ulrich Schmidt

Abstract

This paper analyzes whether social comparison can explain the low take-up of disaster insurance usually reported in field studies. We argue that risks in the case of disasters are highly correlated between subjects whereas risks for which high insurance take-up can be observed (e.g. extended warranties or cell phone insurance) are typically idiosyncratic. We set up a simple model with social reference points and show that in the presence of inequality aversion social comparison makes insurance indeed less attractive if risks are correlated. In addition we conducted a simple experiment which confirms these theoretical results. The average willingness to pay for insurance is significantly higher for idiosyncratic than for correlated risks. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Andreas Friedl & Katharina Lima de Miranda & Ulrich Schmidt, 2014. "Insurance demand and social comparison: An experimental analysis," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 97-109, April.
    • Handle: RePEc:kap:jrisku:v:48:y:2014:i:2:p:97-109
    DOI: 10.1007/s11166-014-9189-9
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    More about this item

    Keywords

    Disaster insurance; Social reference points; Loss aversion; Inequality aversion; C91; D03; D14; D81; G22;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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