Climate change catastrophes and insuring decisions: A study in the presence of ambiguity

• Published in: Journal of economic behavior & organization 2020-12, Vol.180, p.992-1002
• Main Author: le Roux, Sara
• Format: Article
• Language: English
• Subjects: Choquet expected utility; Climate change catastrophes; Insurance; Lemons market; Nudge; Public goods; Strategic substitutes; Uncertainty
• ISSN: 0167-2681; 1879-1751
• DOI: 10.1016/j.jebo.2018.07.021

•Subjects respond in a pessimistic/averse manner to the uncertainty surrounding climate change and climate change catastrophes, with 67% of subjects successfully purchasing the climate change insurance in the base treatment.•When subjects have more information about the growing frequency of such events, 79% successfully ensure themselves.•A lemons problem may arise with only high-risk individuals/regions subscribing towards climate change insurance and suggests that government intervention may be required to ensure market failures do not arise.•When the strategic uncertainty of coordination with another person is removed, 81% of subjects are successful in buying the insurance.•An indirect intervention in the form of a nudge was unsuccessful, with only 58% of subjects successfully buying the insurance. This paper attempts to study how individuals respond to the availability of an insurance that would safeguard their interests if a climate change catastrophe occurred. If such an insurance is available to them, do individuals insure themselves sufficiently? Further, the study investigates if information regarding the past occurrence of the catastrophic event leads to an increase in insurance subscriptions and/or the emergence of a lemons market. Finally, policy implications are investigated - Can an indirect intervention in the form of a “nudge” ensure a better outcome?