Why People Buy Insurance: A Modern Answer to an Old Question
13 Pages Posted: 7 Apr 2019
Date Written: March 14, 2019
In this essay, I revisit the question of which motive underlies insurance demand. I draw on the literature of state-dependent utility and on the literature of imperfectly divisible consumption to argue that the general purpose of insurance is not a risk transfer, but meeting a conditional need. I discuss how this understanding of insurance extends the traditional view of insurance and I show how this extension has implications for our discipline’s research agenda and policy advice.
Keywords: Insurance, Risk Aversion, State Dependence, Divisibility of Consumption, Risk Preferences
JEL Classification: D01, D14, D81, G22
Suggested Citation: Suggested Citation