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Institutional Quality, Knightian Uncertainty, and Insurability; A Cross-Country Analysis

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  • S. Nuri Erbas
  • Chera L. Sayers

Abstract

Knightian uncertainty (ambiguity) implies presence of uninsurable risks. Institutional quality may be a good indicator of Knightian uncertainty. This paper correlates non-life insurance penetration in 70 countries with income level, financial sector depth, country risk, a measure of cost of insurance, and the World Bank governance indexes. We find that institutional quality-transparency-uncertainty nexus is the dominant determinant of insurability across countries, surpassing the explanatory power of income level. Institutional quality, as it reflects on the level of uncertainty, is the deeper determinant of insurability. Insurability is lower when governance is weaker.

Suggested Citation

  • S. Nuri Erbas & Chera L. Sayers, 2006. "Institutional Quality, Knightian Uncertainty, and Insurability; A Cross-Country Analysis," IMF Working Papers 06/179, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/179
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    References listed on IDEAS

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    1. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, June.
    2. Udaibir S Das & Richard Podpiera & Nigel Davies, 2003. "Insurance and Issues in Financial Soundness," IMF Working Papers 03/138, International Monetary Fund.
    3. Robin M. Hogarth & Howard Kunreuther, 1992. "Pricing Insurance and Warranties: Ambiguity and Correlated Risks," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 17(1), pages 35-60, June.
    4. Kunreuther, Howard & Meszaros, Jacqueline & Hogarth, Robin M. & Spranca, Mark, 1995. "Ambiguity and underwriter decision processes," Journal of Economic Behavior & Organization, Elsevier, vol. 26(3), pages 337-352, May.
    5. S. Nuri Erbas, 2004. "Ambiguity, Transparency, and Institutional Strength," IMF Working Papers 04/115, International Monetary Fund.
    6. Arvind Subramanian & Francesco Trebbi & Dani Rodrik, 2002. "Institutions Rule; The Primacy of Institutions over Integration and Geography in Economic Development," IMF Working Papers 02/189, International Monetary Fund.
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