The Demand for Insurance and Protection: The Case of Irreplaceable Commodities

Abstract

Insurance and protection against various kinds of losses are both valuable activities provided to a large and perhaps increasing extent by the public sector. If these activities are to be organized at an appropriate level of intensity, it is necessary to have a conceptual understanding of their value to the individual. While I. Ehrlich and G. Becker1 have provided a theoretical development of individual demands for insurance and self-protection (and the interactions between these two activities) for the case of commodities that are valued appropriately in the market place, a similar theory is lacking for the large class of commodities that are essentially unique or irreplaceable (commodities for which there are no perfect market substitutes) such as family snapshots, the family pet, good health, the life of a beloved spouse or child, etc. In this paper we present a new theoretical characterization of such commodities and develop some results concerning the demand for insurance and the value of increases in the level of protection for such commodities. Replaceable commodities are shown to be a special case of the more general theory.