Entropy Characterisation of Insurance Demand: Theory and Evidence
This paper characterises the insurance demand in terms of the entropy of the underlying probability distribution for losses. A characterisation of this nature provides the prediction that insurance for large losses with small probabilities tends to be purchased less frequently than insurance for moderate losses with higher probabilities, without deviating from the standard expected utility framework. The predictions of the theoretical model are tested empirically using household data collected in Vietnam.
|Date of creation:||Feb 2010|
|Date of revision:|
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