Insurance Demand for Disaster-Type Risks and the Separation of Attitudes Toward Risk and Ambiguity: An Experimental Study

Document de Travail No. 2008-05

21 Pages Posted: 5 May 2011

See all articles by Brunette Marielle

Brunette Marielle

LEF-ENGREF-INRA

Laure Cabantous

Cass Business School, City University London

Stephane Couture

ESR-INRA

Anne Stenger

affiliation not provided to SSRN

Date Written: January 1, 2009

Abstract

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).

Keywords: Experimental Economics, Insurance, Self-Insurance, Public Policy, Forest, Ambiguity, Risk

JEL Classification: C91, D81, Q23

Suggested Citation

Marielle, Brunette and Cabantous, Laure and Couture, Stephane and Stenger, Anne, Insurance Demand for Disaster-Type Risks and the Separation of Attitudes Toward Risk and Ambiguity: An Experimental Study (January 1, 2009). Document de Travail No. 2008-05 , Available at SSRN: https://ssrn.com/abstract=1800545 or http://dx.doi.org/10.2139/ssrn.1800545

Brunette Marielle (Contact Author)

LEF-ENGREF-INRA ( email )

14 rue Girardet
Nancy, 54042
France

Laure Cabantous

Cass Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Stephane Couture

ESR-INRA

Chemin de Borde-Rouge
Auzeville B.P. 27
Castanet-Tolosan Cedex, 31326
France

Anne Stenger

affiliation not provided to SSRN ( email )

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