Contract nonperformance risk and uncertainty in insurance markets

Biener, Christian, Landmann, Andreas and Santana-Penczynski, Maria Isabel (2019) Contract nonperformance risk and uncertainty in insurance markets. Journal of Public Economics, 175. pp. 65-83. ISSN 0047-2727

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Insurance contracts may fail to perform, leading to a default on valid claims. We relax the standard assumption of known probabilities for such defaults by allowing for uncertainty. Within a large behavioral experiment, we show that introducing risk and uncertainty each leads to significant reductions in insurance demand and that the effects are comparable in magnitude (17.1 and 14.5 percentage points). Furthermore, risk- and ambiguity-averse participants are affected most. These findings are in line with models incorporating ambiguity attitudes or, alternatively, pessimistic beliefs. An analysis of the belief and decision dynamics suggests persistent pessimistic priors and disregard of peer experiences, leading to a stable uncertainty effect.

Item Type: Article
Faculty \ School: Faculty of Social Sciences > School of Economics
Faculty of Social Sciences > School of International Development
Depositing User: LivePure Connector
Date Deposited: 11 Jul 2019 08:32
Last Modified: 11 Jun 2020 01:11
DOI: 10.1016/j.jpubeco.2019.05.001

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