A microeconometric analysis of risk aversion and the decision to self-insure
This study estimates a von Neumann-Morgenstern utility function using market data and microeconometric methods. We investigate the decision whether to purchase insurance against the risk of telephone line trouble in the home. Using the choices of approximately 10,000 residential customers, we determine the shape of the utility function and the degree of risk aversion. We find that risk aversion varies systematically in the population and varies with the level of income and that the observed choice behavior is consistent with expected utility maximization.
© 1994 by The University of Chicago. We thank Chris Pleatsikas and Kristina Sepetys for research assistance and David Grether, Louis Wilde, and seminar participants at the University of Southern California Department of Decision Systems for their helpful comments. We also thank the referee, who provided very detailed and helpful comments. Formerly SSWP 784.
Published - sswp784_-_published.pdf