Insurance Demand for Disaster-type Risks and the Separation of Attitudes toward Risk and Ambiguity: an Experimental Study
This article presents the results of an experiment designed to test theoretical predictions about the impact of public compensation schemes and ambiguity on insurance and self-insurance decisions. Consistent with theory, we find that government assistance significantly reduces willingness to pay (WTP) for insurance and self-insurance (compared with a free insurance market). As expected, we also find significant differences between WTPs for insurance under different types of government compensation programs. For example, results from our experiment confirm the prediction that the WTP for insurance is smaller under a “Fixed Help” program than under a “Contingent Fixed Help” program where the government assistance is conditioned to the purchase of an insurance policy. Thirdly, we find that ambiguity, i.e., uncertainty about probability, significantly increases WTPs for insurance. This result, which indicates that decision-makers are ambiguity averse, is in line with previous results on the impact of ambiguity on insurance demand for low probability risks. Lastly, our experiment provides a clear support for the hypothesis that attitude to risk and attitude to ambiguity are two independent phenomena. In fact in this experiment, decision-makers are both risk-seekers (i.e., the mean WTP for insurance is on average smaller than the expected value of the loss) and ambiguity averse (i.e., the mean WTP for insurance is on average higher for an ambiguous risk than for a ’risky’ risk).
|Date of creation:||Oct 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 33 (0)3 83 39 68 66
Fax: 33 (0)3 83 37 06 45
Web page: http://www.nancy.inra.fr/lef
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kent Smetters, 2005. "Insuring Against Terrorism: The Policy Challenge," NBER Working Papers 11038, National Bureau of Economic Research, Inc.
- 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.
- Colin F. Camerer & Howard Kunreuther, 1989. "Decision processes for low probability events: Policy implications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 565-592.
- Coursey, Don L & Hovis, John L & Schulze, William D, 1987. "The Disparity between Willingness to Accept and Willingness to Pay Measures of Value," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 679-90, August.
- Howard Kunreuther & Mark Pauly, 2004. "Neglecting Disaster: Why Don't People Insure Against Large Losses?," Journal of Risk and Uncertainty, Springer, vol. 28(1), pages 5-21, January.
- Howard Kunreuther & Mark Pauly, 2006. "Rules rather than discretion: Lessons from Hurricane Katrina," Journal of Risk and Uncertainty, Springer, vol. 33(1), pages 101-116, September.
- Beattie, Jane & Loomes, Graham, 1997. "The Impact of Incentives upon Risky Choice Experiments," Journal of Risk and Uncertainty, Springer, vol. 14(2), pages 155-68, March.
- Hogarth, Robin M & Kunreuther, Howard, 1995. "Decision Making under Ignorance: Arguing with Yourself," Journal of Risk and Uncertainty, Springer, vol. 10(1), pages 15-36, January.
- McClelland, Gary H & Schulze, William D & Coursey, Don L, 1993. " Insurance for Low-Probability Hazards: A Bimodal Response to Unlikely Events," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 95-116, August.
- Ozlem Ozdemir, 2007. "Valuation of Self-Insurance and Self-Protection under Ambiguity: Experimental Evidence," Jena Economic Research Papers 2007-034, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
- Di Mauro, Carmela & Maffioletti, Anna, 1996. "An Experimental Investigation of the Impact of Ambiguity on the Valuation of Self-Insurance and Self-Protection," Journal of Risk and Uncertainty, Springer, vol. 13(1), pages 53-71, July.
- Robin M. Hogarth & Hillel J. Einhorn, 1990. "Venture Theory: A Model of Decision Weights," Management Science, INFORMS, vol. 36(7), pages 780-803, July.
- Kaplow, Louis, 1991.
" Incentives and Government Relief for Risk,"
Journal of Risk and Uncertainty,
Springer, vol. 4(2), pages 167-75, April.
- Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
- Howard Kunreuther & Mark Pauly, 2006. "Rules Rather Than Discretion: Lessons from Hurricane Katrina," NBER Working Papers 12503, National Bureau of Economic Research, Inc.
- Philip Ganderton & David Brookshire & Michael McKee & Steve Stewart & Hale Thurston, 2000. "Buying Insurance for Disaster-Type Risks: Experimental Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 271-289, May.
- Sujoy Chakravarty & Jaideep Roy, 2009. "Recursive expected utility and the separation of attitudes towards risk and ambiguity: an experimental study," Theory and Decision, Springer, vol. 66(3), pages 199-228, March.
- Lewis, Tracy & Nickerson, David, 1989. "Self-insurance against natural disasters," Journal of Environmental Economics and Management, Elsevier, vol. 16(3), pages 209-223, May.
- Ganderton, Philip T, et al, 2000. " Buying Insurance for Disaster-Type Risks: Experimental Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 271-89, May.
- Hogarth, Robin M & Kunreuther, Howard, 1989. " Risk, Ambiguity, and Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 5-35, April.
When requesting a correction, please mention this item's handle: RePEc:lef:wpaper:2008-05. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Benoit Vandenbroucke)The email address of this maintainer does not seem to be valid anymore. Please ask Benoit Vandenbroucke to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.