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Voluntary internalization of speeding externalities with vehicle insurance

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Author Info

  • Hultkrantz, Lars
  • Nilsson, Jan-Eric
  • Arvidsson, Sara

Abstract

High speed is an important determinant of accidents for speeders as well as for other motorists. This paper develops a framework for analyzing instruments that encourage drivers to internalize the full consequences of their behavior with respect to choice of speed using Pay-As-You-Speed (PAYS) insurance, possibly as an extension of Pay-As-You-Drive (PAYD) insurance. We demonstrate how the combination of a Pigovian taxation scheme and PAYS can be designed in a setting involving two principals (the state and an insurance company) that affect the incentives of commuters to choose between driving and other modes of transport and for those that use the car mode to drive carefully. While the government is assumed to maximize overall social efficiency and therefore wants to implement marginal cost pricing, insurance companies do actuarial pricing, i.e. average cost pricing within risk classes that are homogeneous to the degree that the insurers have information about actual behavior. PAYS insurance improves the insurance industry’s possibility to differentiate premiums according to behavior and therefore to target risk classes in a better way than today. Moreover, since our framework is designed to accomplish differentiation by self-selection, compulsory regulation is not necessary, although there may be reason for the government to facilitate the implementation of the new technology.

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Bibliographic Info

Article provided by Elsevier in its journal Transportation Research Part A: Policy and Practice.

Volume (Year): 46 (2012)
Issue (Month): 6 ()
Pages: 926-937

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Handle: RePEc:eee:transa:v:46:y:2012:i:6:p:926-937

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Related research

Keywords: Pay-As-You-Speed; Pay-As-You-Drive; Usage-based insurance; Intelligent speed adaptation; Transport telematics; Pigou pricing;

References

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  1. Parry, Ian & Small, Kenneth, 2002. "Does Britain or the United States Have the Right Gasoline Tax?," Discussion Papers dp-02-12-, Resources For the Future.
  2. Richard Arnott & An Yan, 2000. "The Two-Mode Problem: Second-Best Pricing and Capacity," Boston College Working Papers in Economics 474, Boston College Department of Economics.
  3. Lars Hultkrantz & Gunnar Lindberg, 2011. "Pay-as-you-speed An Economic Field Experiment," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 45(3), pages 415-436, September.
  4. Hutlkrantz, Lars & Armelius, Hanna, 2005. "The Politico-Economic Link Between Public Transport And Road Pricing: An Ex-Ante Study Of The Stockholm Road-Pricing Trial," Working Papers 2005:8, Örebro University, School of Business.
  5. Glazer, Amihai & Niskanen, Esko, 2000. "Which consumers benefit from congestion tolls?," University of California Transportation Center, Working Papers qt33d88115, University of California Transportation Center.
  6. Gunnar Lindberg, 2001. "Traffic Insurance and Accident Externality Charges," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 35(3), pages 399-416, September.
  7. Kutzbach, Mark J., 2009. "Motorization in developing countries: Causes, consequences, and effectiveness of policy options," Journal of Urban Economics, Elsevier, vol. 65(2), pages 154-166, March.
  8. Parry, Ian W. H., 2004. "Comparing alternative policies to reduce traffic accidents," Journal of Urban Economics, Elsevier, vol. 56(2), pages 346-368, September.
  9. Cohen, Alma & Dehejia, Rajeev, 2004. "The Effect of Automobile Insurance and Accident Liability Laws on Traffic Fatalities," Journal of Law and Economics, University of Chicago Press, vol. 47(2), pages 357-93, October.
  10. Parry, Ian, 2005. "Is Pay-As-You-Drive Insurance a Better Way to Reduce Gasoline than Gasoline Taxes?," Discussion Papers dp-05-15, Resources For the Future.
  11. Aaron S. Edlin & Pinar Karaca-Mandic, 2004. "The Accident Externality from Driving," Public Economics 0401003, EconWPA.
  12. Steven Shavell, 2000. "On the Social Function and the Regulation of Liability Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 25(2), pages 166-179, April.
  13. Shavell, Steven, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 541-62, November.
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