Insurance as a Normal Good: Empirical Evidence for a Puzzle

In this paper, we combine banking and car insurance data to examine the relationship between individual insurance demand and wealth. Controlling for the value of the car, we provide evidence for a positive relationship, suggesting that insurance is a normal good. This result contrasts with the common Decreasing Absolute Risk Aversion (DARA) hypothesis. However, we show that the investment in risky assets increases with wealth, which is consistent with DARA. Overall, our empirical results can hardly be consistent with expected utility theory. JEL codes: C34, C35, D81, G11. 1 We would like to thank Johannes Binswanger, Jacques Foncel, Ray Rees and Alban Thomas for helpful comments and discussions on this work. All remaining errors are solely ours. 2 Corresponding author. Address: Université Lille 3, Maison de la Recherche, BP 60149, 59653 Villeneuve d’Ascq, France. E-mail: [email protected]