Risk Attitudes with State-Dependent Indivisibilities in Consumption

32 Pages Posted: 15 Nov 2018

See all articles by Markus Fels

Markus Fels

University of Dortmund - Department of Economics

Date Written: October 24, 2018

Abstract

The existence of state-dependent indivisible consumption opportunities influences a person's risk attitudes. In general, people are not risk averse anymore, even if utility from divisible consumption is concave, because indivisibilities result in the marginal utility of wealth to differ across states. I propose a definition of insurance in the context of state-dependent preferences and investigate the different motives underlying insurance demand. The very reasons that make people not risk-averse turn out to be the basis of a desire to insure. This calls into question the standard approach that bases insurance demand on risk aversion with important implications for policy and research.

Keywords: Risk Preferences, Indivisible Consumption, Insurance, Gambling

JEL Classification: D01, D81

Suggested Citation

Fels, Markus, Risk Attitudes with State-Dependent Indivisibilities in Consumption (October 24, 2018). Available at SSRN: https://ssrn.com/abstract=3272200 or http://dx.doi.org/10.2139/ssrn.3272200

Markus Fels (Contact Author)

University of Dortmund - Department of Economics ( email )

D-44221 Dortmund
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
16
Abstract Views
215
PlumX Metrics