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Internalizing externalities of loss prevention through insurance monopoly: an analysis of interdependent risks

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Author Info
Annette Hofmann ()
Abstract

When 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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File URL: http://hdl.handle.net/10.1007/s10713-007-0004-2
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Publisher Info
Article provided by Springer in its journal THE GENEVA RISK AND INSURANCE REVIEW.

Volume (Year): 32 (2007)
Issue (Month): 1 (June)
Pages: 91-111
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Handle: RePEc:kap:geneva:v:32:y:2007:i:1:p:91-111

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Related research
Keywords: Externalities; Insurance monopoly; Nash equilibrium; Social welfare; C70; D62; G22;

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  12. Felder, Stefan, 1996. "Fire insurance in Germany: A comparison of price-performance between state monopolies and competitive regions," European Economic Review, Elsevier, vol. 40(3-5), pages 1133-1141, April. [Downloadable!] (restricted)
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