Entropy Characterisation of Insurance Demand: Theory and Evidence

Author Name NAKATA Hiroyuki  (University of Essex) /SAWADA Yasuyuki  (Faculty Fellow, RIETI) /TANAKA Mari  (The University of Tokyo)
Creation Date/NO. February 2010 10-E-009
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This paper characterises the insurance demand in terms of the entropy of the underlying probability distribution for losses. A characterisation of this nature provides the prediction that insurance for large losses with small probabilities tends to be purchased less frequently than insurance for moderate losses with higher probabilities, without deviating from the standard expected utility framework. The predictions of the theoretical model are tested empirically using household data collected in Vietnam.