Ruhr Economic Papers

Ruhr Economic Papers #805

Risk Attitudes with State-Dependent Indivisibilities in Consumption

by Markus Fels

TUD, 04/2019, 40 S./p., 8 Euro, ISBN 978-3-86788-933-9 DOI: 10.4419/86788933

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Abstract

Some consumption opportunities are both indivisible and only valuable in particular tates of nature.
The existence of such state-dependent indivisible consumption opportunities influences a person’s
risk attitudes. In general, people are not risk averse anymore even if utility from divisible consumption
is concave. I propose a definition of insurance in the context of state-dependent preferences and
investigate the different motives underlying insurance demand. The same reasons that rule out risk
aversion turn out to be the basis of a desire to insure. This calls into question the standard approach
that bases insurance demand on risk aversion with important implications for policy and research.

JEL-Classification: D01, D81

Keywords: Risk preferences; indivisible consumption; insurance; gambling

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