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Background Uncertainty and the Demand for Insurance Against Insurable Risks

  • Luigi Guiso

    ()

    (CEPR and Ente “Luigi Einaudi” per gli Studi Monetari, Bancari e Finanziari, Via Due Macelli, University of Sassari, 73-00187 Rome, Italy.)

  • Tullio Jappelli

    ()

    (Dipartimento di Scienze Economiche, University of Salerno, 84084 Fisciano, Salerno, Italy and CEPR.)

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 characterized by decreasing absolute prudence. The Geneva Papers on Risk and Insurance Theory (1998) 23, 7–27. doi:10.1023/A:1008621712979

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Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 23 (1998)
Issue (Month): 1 (June)
Pages: 7-27

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Handle: RePEc:pal:genrir:v:23:y:1998:i:1:p:7-27
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  1. 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.
  2. 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.
  3. Miles S. Kimball, 1991. "Standard Risk Aversion," NBER Technical Working Papers 0099, National Bureau of Economic Research, Inc.
  4. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  5. Darrell Duffie & Thaleia Zariphopoulou, 1993. "Optimal Investment With Undiversifiable Income Risk," Mathematical Finance, Wiley Blackwell, vol. 3(2), pages 135-148.
  6. Elmendorf, Douglas W & Kimball, Miles S, 2000. "Taxation of Labor Income and the Demand for Risky Assets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 801-33, August.
  7. 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-.
  8. Anne Gron & Deborah Lucas, 1995. "External Financing and Insurance Cycles," NBER Working Papers 5229, National Bureau of Economic Research, Inc.
  9. EECKHOUDT, Louis & Christian GOLLIER & Harris SCHLESINGER, 1994. "Changes in Background Risk and Risk Taking Behavior," Working Papers 005, Risk and Insurance Archive.
  10. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings uncertainty and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 307-337, November.
  11. 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.
  12. Lewis, Frank D, 1989. "Dependents and the Demand for Life Insurance," American Economic Review, American Economic Association, vol. 79(3), pages 452-67, June.
  13. Dionne, G. & Gollier, C., 1991. "Comparative Statics Under Multiple Sources of Risk with Appllications to Insurance Demand," Cahiers de recherche 9133, Universite de Montreal, Departement de sciences economiques.
  14. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
  15. 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.
  16. 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.
  17. Skinner, Jonathan, 1988. "Risky income, life cycle consumption, and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 237-255, September.
  18. Jeff Dominitz & Charles F. Manski, 1994. "Using Expectations Data to Study Subjective Income Expectations," Econometrics 9411003, EconWPA.
  19. Miles S. Kimball, 1991. "Precautionary Motives for Holding Assets," NBER Working Papers 3586, National Bureau of Economic Research, Inc.
  20. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers.
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