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Miles, Speed and Technology: Traffic Safety under Oligopolistic Insurance

Author

Listed:
  • Maria Dementyeva

    (VU University Amsterdam, the Netherlands)

  • Erik T. Verhoef

    (VU University Amsterdam, the Netherlands)

Abstract

This paper studies road safety and accident externalities when insurance companies have market power, and can influence road users' driving behaviour via insurance premiums. We obtain both welfare and profit maximizing marginal conditions for first- and second-best insurance premiums for monopoly and oligopoly market structures in insurance. The insurance program consists of an insurance premium, and marginal dependencies ("slopes") of that premium on speed and on the own safety technology choice. While a private monopolist internalizes accident externalities up to the point where compensations to users' benefit matches the full (immaterial) costs, in oligopolistic markets insurance firms do not fully internalize accident externalities that their customers impose upon one another. Therefore, non-optimal premiums as well as speed and technology control apply. Analytical results demonstrate how insurance firms' incentives to influence traffic safety deviate from socially optimal incentives.

Suggested Citation

  • Maria Dementyeva & Erik T. Verhoef, 2015. "Miles, Speed and Technology: Traffic Safety under Oligopolistic Insurance," Tinbergen Institute Discussion Papers 15-025/VIII, Tinbergen Institute, revised 08 Mar 2016.
    • Handle: RePEc:tin:wpaper:20150025
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    References listed on IDEAS

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    Cited by:

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    2. Tscharaktschiew, Stefan, 2020. "Why are highway speed limits really justified? An equilibrium speed choice analysis," Transportation Research Part B: Methodological, Elsevier, vol. 138(C), pages 317-351.

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    More about this item

    Keywords

    Accident externalities; congestion externalities; traffic regulations; road safety; second-best; market power;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

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