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Self-protection and insurance with interdependencies

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  • Kunreuther, Howard
  • Muermann, Alexander
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    Abstract

    We study optimal investment in self-protection of insured individuals when they face interdependencies in the form of potential contamination from others. If individuals cannot coordinate their actions, then the positive externality of investing in self-protection implies that, in equilibrium, individuals underinvest in self-protection. Limiting insurance coverage through deductibles or selling “at-fault” insurance can partially internalize this externality and thereby improve individual and social welfare. --

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    File URL: http://econstor.eu/bitstream/10419/25523/1/538467959.PDF
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    Bibliographic Info

    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2007/22.

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    Date of creation: 2007
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    Handle: RePEc:zbw:cfswop:200722

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    Related research

    Keywords: Externality; Mitigation; Insurance;

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    1. Ian Ayres & Steven D. Levitt, 1997. "Measuring Positive Externalities from Unobservable Victim Precaution: An Empirical Analysis of Lojack," NBER Working Papers 5928, National Bureau of Economic Research, Inc.
    2. Shavell, Steven, 1991. "Individual precautions to prevent theft: Private versus socially optimal behavior," International Review of Law and Economics, Elsevier, vol. 11(2), pages 123-132, September.
    3. Thomas VON UNGERN-STERNBERG, 1995. "The Limits of Competition : Housing Insurance in Switzerland," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9511, Université de Lausanne, Faculté des HEC, DEEP.
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    Cited by:
    1. Alexander Muermann & Howard Kunreuther, 2008. "Self-protection and insurance with interdependencies," Journal of Risk and Uncertainty, Springer, vol. 36(2), pages 103-123, April.

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