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Insurance demand and social comparison: An experimental analysis

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Abstract

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.

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Acknowledgments

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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Authors and Affiliations

  1. Kiel Institute for the World Economy, 24105, Kiel, Germany

    Andreas Friedl & Ulrich Schmidt

  2. Department of Economics, University of Kiel, Kiel, Germany

    Katharina Lima de Miranda & Ulrich Schmidt

Authors
  1. Andreas Friedl
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  2. Katharina Lima de Miranda
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  3. Ulrich Schmidt
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Correspondence to Ulrich Schmidt.

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Friedl, A., Lima de Miranda, K. & Schmidt, U. Insurance demand and social comparison: An experimental analysis. J Risk Uncertain 48, 97–109 (2014). https://doi.org/10.1007/s11166-014-9189-9

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  • DOI: https://doi.org/10.1007/s11166-014-9189-9

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