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The Demand for Life Insurance: An Application of the Economics of Uncertainty



    1. Graduate School of Business, University of Washington
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    • This research is a version of the author's dissertation written (August 1977) at the University of Pennsylvania. I am indebted to Marshall E. Blume, who supervised this research, and to Irwin Friend, David Cummins, Howard Winklevoss, and Nancy Jacob for their useful comments. Additional, the comments of Øyvind Bøhren, my doctoral students, and the referee, Richard Roll, have been very beneficial. I fondly acknowledge my affiliation with the S. S. Huebner Foundation for Insurance Education as a Huebner Fellow from 1973 to 1976. The Foundation was very generous in its financial and intellectual support.


Financial economists typically assume that capital income uncertainty, derived from investments in uncertain returned marketable securities, represents the major source of household consumption uncertainty. But, for many households, if not most, labor income uncertainty dominates capital income uncertainty.

This study analyzes households optimal reactions to labor income (human capital) uncertainty that is derived from the possibility of their wage earners' non–survival. By introducing a risk resolution mechanism—an insurance market—and allowing for the possibility that future tastes may be state–dependent, simple demand–for–insurance equations are mathematically derived to explicitly describe households optimal responses to human capital uncertainty.

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