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There is reason to go slow on a behavioral explanation here. In addition to the fact that most people do not buy warranties, competitively sold warranties are available for large purchases like automobiles (after the “free” manufacturer’s warranty expires). It may also be that warranties are a form of price discrimination. A buyer who considers himself lucky for having gotten a good deal on a good product may be more willing to pay for a warranty than a buyer who thinks his particular purchase and purchase price are run of the mill and par for the course. The first buyer, having discovered “treasure,” may be more willing to invest in protecting it. Finally, the price responsiveness of demand for warranties implies that, even if the preferences are not so rational, consumer behavior in fulfilling those preferences does repeat the standard model.

Regulation of warranty pricing or terms is a possible public policy solution, although at present it is uncommon (but not unknown). An alternative policy intervention would be the provision of information on frequency of repairs, so that buyers could make a better calculation of the expected value of a warranty. Indeed, such information would be useful across a whole range of insurance products, from warranties to long-term care insurance, where information on probabilities tends to be either absent or grossly distorted.

THE NONPOOR HEALTH UNINSURED

The two examples above are cases of overpurchase of insurance. What about behavioral versus rational explanations for under- or nonpurchase? The most familiar example from my perspective is the nonpurchase of health insurance. Some of the uninsured people in the United States have such low incomes that the explanation for nonpurchase is obvious: They can afford neither to pay for care nor to pay for insurance. But a fraction known to be “sizeable” could afford health insurance, in the sense that, had they bought it (even in the expensive individual market), they would have had enough left over for decent levels of other consumption. Many other people facing the same circumstances do have and pay for insurance, so how can that fraction say they cannot afford insurance? (Bundorf and Pauly, 2006; Gruber, 2008). Bear in mind, too, that while they may get some free care if their bill is enormous, they risk having to pay the bill themselves up to that point.

So why are some of the nonpoor uninsured? The all-purpose explanation is that their tastes for insurance are weaker than those of otherwise similar people, but a “tastes” explanation is distinctly unsatisfying. For this population, the consequence of not paying an insurance premium is not a guarantee that they will have that much more income available for other types of consumption; there is still the real prospect of expected out-of-pocket expenses. In short, the alternative to insurance they think they cannot afford is not no expense but, rather, a risky prospect of high expenses that they can even less afford. (That the uninsured are charged much higher retail or undiscounted prices for hospital inpatient and outpatient care is another reason why insurance is a better buy than noninsurance.) Even with the likelihood of nonpayment for catastrophically large expenses, the real chance of severe financial distress should motivate purchase by everyone with income or wealth above some relatively low level. Why doesn’t it?

There are plausible explanations from the behavioral side. To begin with, it appears that some people are just not risk averse enough to be willing to pay the administrative loading for health insurance. This loading can be high—just look at the individual insurance policies that people were initially offered on the Internet—but, in principle, the great bulk of the uninsured population has access to lower prices and tax-subsidized employment-based group insurance (the insurance negotiated by a company for all its employees is likely to be cheaper). A substantial fraction (perhaps a fifth) of the uninsured have turned down group insurance for