DP1423 Background Uncertainty and the Demand for Insurance Against Insurable Risks

Author(s): Luigi Guiso, Tullio Jappelli
Publication Date: June 1996
Keyword(s): Background Risk, Insurance, Prudence
JEL(s): D81
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1423

Theory suggests that people facing higher uninsurable background risk buy more insurance against other risks that are insurable. This proposition is supported by Italian cross-sectional data. It is shown that the probability of purchasing casualty insurance increases with earnings uncertainty. This finding is consistent with consumer preferences being characterized by decreasing absolute prudence.