Habit Formation and the Demand for Insurance

JOURNAL OF RISK AND INSURANCE, Vol. 63, No. 1, March 1996

Posted: 16 Jun 1998

See all articles by Mounira Ben-Arab

Mounira Ben-Arab

University of Tunis

Eric Briys Hec

Paris and Tillinghast

Harris Schlesinger

University of Alabama; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

This article models consumption and insurance decisions in a continuous-time, finite-horizon setting. We allow the consumer to acquire a "taste for the good life" by making current preferences for consumption dependent upon the individual's past consumption. The optimal consumption path is smoother and the optimal level of insurance greater in this setting than they are in an identical model without habit formation. Moreover, the optimal level of insurance increases over the planning horizon, approaching full coverage in the limit. These results help to explain the observed phenomenon of individuals' over-purchasing insurance, such as a propensity for low deductibles.

JEL Classification: E21

Suggested Citation

Ben-Arab, Mounira and Hec, Eric Briys and Schlesinger, Harris, Habit Formation and the Demand for Insurance. JOURNAL OF RISK AND INSURANCE, Vol. 63, No. 1, March 1996, Available at SSRN: https://ssrn.com/abstract=3092

Mounira Ben-Arab

University of Tunis

92, Rue 9 Avril
Tunis, 1938 -1007
Tunisia

Eric Briys Hec

Paris and Tillinghast

Paris
France

Harris Schlesinger (Contact Author)

University of Alabama ( email )

P.O. Box 870244
200 Alston Hall, Box 870224
Tuscaloosa, AL 35487
United States
205-348-7858 (Phone)
205-348-0590 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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