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Buying Insurance for Disaster-Type Risks: Experimental Evidence

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  • Philip Ganderton
  • David Brookshire
  • Michael McKee
  • Steve Stewart
  • Hale Thurston

Abstract

This paper presents a series of experiments that confront subjects with low probability, high loss situations. A rich parameter set is examined and we find subjects respond to low probability, high loss risks in predictable ways. As loss events become more likely, or loss amounts get larger, or the cost of insurance falls, subjects are more likely to buy indemnifying insurance, even for the class of low probability risks that usually presents problems for standard expected utility theory. A novel application of Cameron's method to estimate willingness to pay from dichotomous choice responses allows us to estimate willingness to pay for insurance. We do not observe the bimodal distribution of bids found in other studies of similar risk situations. Copyright Kluwer Academic Publishers 2000

Suggested Citation

  • Philip Ganderton & David Brookshire & Michael McKee & Steve Stewart & Hale Thurston, 2000. "Buying Insurance for Disaster-Type Risks: Experimental Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 271-289, May.
    • Handle: RePEc:kap:jrisku:v:20:y:2000:i:3:p:271-289
    DOI: 10.1023/A:1007871514658
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