Insurance demand and social comparison: An experimental analysis
- First Online:
- Cite this article as:
- Friedl, A., Lima de Miranda, K. & Schmidt, U. J Risk Uncertain (2014) 48: 97. doi:10.1007/s11166-014-9189-9
- 479 Views
This paper analyzes whether social comparison can explain the low take-up of disaster insurance usually reported in field studies. We argue that risks in the case of disasters are highly correlated between subjects whereas risks for which high insurance take-up can be observed (e.g. extended warranties or cell phone insurance) are typically idiosyncratic. We set up a simple model with social reference points and show that in the presence of inequality aversion social comparison makes insurance indeed less attractive if risks are correlated. In addition we conducted a simple experiment which confirms these theoretical results. The average willingness to pay for insurance is significantly higher for idiosyncratic than for correlated risks.