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Insurance Choices and Sources of Ambiguity

Author

Listed:
  • Daniela Cagno

    (Luiss Guido Carli)

  • Daniela Grieco

    (University of Milan)

Abstract

Uninsurance and underinsurance represent a major policy challenge. A key reason why agents make mistakes might be ascribed to the ambiguity affecting insurance decisions. This paper investigates self-insurance decisions when the probabilities of loss are ambiguous and ambiguity is generated by different sources. We present a model and a set of lab experiments to address two main research questions: are buyers willing to pay more in presence of ambiguity with respect to risk? Is the willingness to pay affected by the source of ambiguity? After measuring subjects’ willingness to pay for insurance when losses are risky, we relate the probability to face losses both to ambiguous events that are context-related (‘external’ sources of ambiguity), and to events that regard the individual ability (‘internal’ sources of ambiguity). We show that subjects’ willingness to pay for insurance depends on the specific source of ambiguity, being lower than willingness to pay in case of risk when the source of ambiguity is internal and decision-makers exhibit overconfidence.

Suggested Citation

  • Daniela Cagno & Daniela Grieco, 2023. "Insurance Choices and Sources of Ambiguity," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 9(1), pages 295-319, March.
    • Handle: RePEc:spr:italej:v:9:y:2023:i:1:d:10.1007_s40797-022-00193-4
    DOI: 10.1007/s40797-022-00193-4
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    More about this item

    Keywords

    Insurance; Ambiguity; Risk; Confidence; Coverage;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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