Insurance and the Preference for Early Resolution of Uncertainty

40 Pages Posted: 15 Apr 2024

See all articles by Johannes Gerd Jaspersen

Johannes Gerd Jaspersen

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Richard Peter

University of Iowa

Marc A. Ragin

University of Georgia; University of Georgia - Department of Insurance, Legal Studies, Real Estate

Date Written: March 29, 2024

Abstract

In this paper, we study the role of preferences over the timing of uncertainty resolution for insurance demand, both theoretically and in an incentivized laboratory experiment. We use Kreps-Porteus-Selden preferences and risk-sensitive preferences to disentangle risk and time. When people prefer to resolve uncertainty early, having to wait for the resolution of the loss raises their willingness to pay for insurance. Our experimental results are directionally consistent with the theoretical prediction but not statistically significant. We also calibrate preference parameters in the two models based on the subjects’ choices in the experiment. Consistent with our results about willingness to pay, the parameters are directionally consistent with a preference for early resolution of uncertainty. Our results have implications for insurance contract design, particularly in the realm of long-term contracting.

Keywords: Insurance Demand, Resolution of Uncertainty, Preference Estimation

JEL Classification: D14, D15, D81, G52

Suggested Citation

Jaspersen, Johannes Gerd and Peter, Richard and Ragin, Marc A. and Ragin, Marc A., Insurance and the Preference for Early Resolution of Uncertainty (March 29, 2024). Available at SSRN: https://ssrn.com/abstract=4778025 or http://dx.doi.org/10.2139/ssrn.4778025

Johannes Gerd Jaspersen (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Schackstr. 4
Munich, DE 80539
Germany

Richard Peter

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

Marc A. Ragin

University of Georgia ( email )

610 S Lumpkin Street
Moore-Rooker A417
Athens, GA 30602-6254
United States
7067132775 (Phone)

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

610 S Lumpkin Street
Moore-Rooker A417
Athens, GA 30602-6254
United States
7067132775 (Phone)

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