Internalizing externalities of loss prevention through insurance monopoly: an analysis of interdependent risks
AbstractWhen risks are interdependent, an agent’s decision to self-protect affects the loss probabilities faced by others. Due to these externalities, economic agents invest too little in prevention relative to the socially efficient level by ignoring marginal external costs or benefits conferred on others. This paper analyzes an insurance market with externalities of loss prevention. It is shown in a model with heterogenous agents and imperfect information that a monopolistic insurer can achieve the social optimum by engaging in premium discrimination. An insurance monopoly reduces not only costs of risk selection, but may also play an important social role in loss prevention. Copyright The Geneva Association 2007
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Bibliographic InfoArticle provided by Springer in its journal THE GENEVA RISK AND INSURANCE REVIEW.
Volume (Year): 32 (2007)
Issue (Month): 1 (June)
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Web page: http://www.springerlink.com/link.asp?id=102897
Externalities; Insurance monopoly; Nash equilibrium; Social welfare; C70; D62; G22;
Find related papers by JEL classification:
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
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