Abstract
The Pratt-Arrow hypothesis of decreasing absolute risk aversion (DARA) is widely invoked in economic models of uncertainty but empirical tests, especially those using nonexperimental data, have yielded mixed results. This paper reexamines the DARA hypothesis using an expected utility model of life insurance demand and a 23-year sample of aggregate time series data from the U.S. After controlling for household size, age, income, loss probabilities, premium expenses, and inflation, the effect of wealth on insurance demand is found to be positive and statistically significant in linear and loglinear regressions, explaining more than 93 percent of the variation in coverage. Thus, in contrast to the prevailing theory, this empirical test presents evidence of increasing absolute risk aversion.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.