Insurance demand and social comparison: An experimental analysis
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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.
KeywordsDisaster insurance Social reference points Loss aversion Inequality aversion
JEL ClassificationC91 D03 D14 D81 G22
We would like to thank Nicolas Treich, Stefan Trautmann and Ulrike Doerr for their helpful comments and Ute Vanini for her support in the execution of the experiment.
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