Journal Article

Insurance Demand and Social Comparison: An Experimental Analysis

Authors

  • Friedl
  • A.
  • Lima de Miranda K.
  • Schmidt
  • U.
Publication Date

This paper analyzes whether social comparison can explain the low take-up of disaster insurance usually reported in field studies. We argue that risks in the case of disasters are highly correlated between subjects whereas risks for which high insurance take-up can be observed (e.g. extended warranties or cell phone insurance) are typically idiosyncratic. We set up a simple model with social reference points and show that in the presence of inequality aversion social comparison makes insurance indeed less attractive if risks are correlated. In addition we conducted a simple experiment which confirms these theoretical results. The average willingness to pay for insurance is significantly higher for idiosyncratic than for correlated risks.

Info

JEL Classification
C91, D14, D81, G22

Key Words

  • disaster insurance
  • inequality aversion
  • loss aversion
  • social reference points