A Micro-Econometric Analysis of Risk-Aversion and the Decision to Self-Insure

Abstract

This study estimates a von Neumann-Morgenstern utility function using market data and micro-econometric 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. We are unable to detect the presence of ambiguity effects or over-weighting of low-probability events.

Additional Information

We thank Chris Pleatsikas and Kristina Sepetys for research assistance, and David Grether, Louis Wilde, and seminar participants at the lTSC Department of Decision Systems for their helpful comments. Published as Cicchetti, Charles J., and Jeffrey A. Dubin. "A microeconometric analysis of risk aversion and the decision to self-insure." Journal of political Economy 102, no. 1 (1994): 169-186.

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