An Experimental Study of the Full-Coverage Puzzle

28 Pages Posted: 17 Feb 2003

See all articles by Itzhak Venezia

Itzhak Venezia

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Zur Shapira

Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Management and Organizational Behavior

Date Written: November 2002

Abstract

One of the most intriguing questions in insurance is the preference of consumers to buy low or no deductible insurance policies. This stands in sharp contrast to the theorem, proved by Mossin, 1968, that when the price of insurance is higher than its actuarial value, then under quite reasonable assumptions full coverage is not optimal. We show in a set of experiments that amateur subjects tend to underestimate the value of a policy with a deductible and that the degree of underestimation depends on the level of the deductible. This implies that a policy with a deductible priced according to the true expected payments may seem "overpriced" to the insured and therefore may not be purchased. Since the values of full coverage policies are not underestimated, the insured may find them as relatively better "deals".

Suggested Citation

Venezia, Itzhak and Shapira, Zur, An Experimental Study of the Full-Coverage Puzzle (November 2002). Available at SSRN: https://ssrn.com/abstract=379300

Itzhak Venezia (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

Zur Shapira

Leonard N. Stern School of Business - Department of Economics ( email )

40 West Fourth Street, 7-06
New York, NY 10012
United States

New York University (NYU) - Department of Management and Organizational Behavior ( email )

44 West 4th Street
New York, NY 10012
United States

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