An Econometric Model Based on the Maxmin Expected Utility Model: An Application to Earthquake Insurance

Abstract

AbstractThis study empirically investigates the influence of ambiguity on consumers’ decision to buy a hypothetical earthquake insurance policy. Using survey data, it identifies effects of specific consumer characteristics on their decision based on the Maxmin Expected Utility (MEU) model. We develop an econometric model consistent with the MEU model derived from axioms. Our study provides three main results: First, respondents’ preferences for the insurance when faced with 1%, 5%, and 10% appraisal risk are generally inconsistent with expected utility theory. Second, respondents demanded more than a 10% reduction in insurance premium as compensation for accepting each tier of appraisal risk. Third, the required discount is greatest among men who had previously purchased earthquake insurance and had experienced earthquake damage to their houses, and the required discount increases with age and education.KeywordsRisk AversionRisk PremiumEconometric ModelInsurance PremiumRelative Risk AversionThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.