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Background Risk and Insurance Take-up under Limited Liability

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  • Gilad Sorek
  • T. Randolph Beard

Abstract

We study the effect of a non-insurable background risk (BGR) on insurance take-up choices over insurable risks made by risk-averse agents under limited liability laws. This economic environment applies, for example, to the consumer’s decision to purchase medical insurance in the face of non-insurable income risk under limited liability provided by bankruptcy. We consider two types of BGR - a wealth deteriorating risk and a mean-preserving risk. We show that the magnitude of both BGR types has a non-monotonic effect on the rate of uninsured consumers. This is in contrast with the standard monotonic effect of background risk on the demand for insurance, obtained for risk-averse agents under full liability.

Suggested Citation

  • Gilad Sorek & T. Randolph Beard, 2019. "Background Risk and Insurance Take-up under Limited Liability," Auburn Economics Working Paper Series auwp2019-05, Department of Economics, Auburn University.
    • Handle: RePEc:abn:wpaper:auwp2019-05
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    File URL: https://cla.auburn.edu/econwp/Archives/2019/2019-05.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Insurance take-up; Bankruptcy; Background Risk;
    All these keywords.

    JEL classification:

    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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