Internalizing externalities of loss-prevention through insurance monopoly: An analysis of interdependent risks
AbstractWhen risks are interdependent, loss-prevention activities of one agent influence the risks faced by others. The social return to an investment in loss-prevention is greater than the private return. From a perspective of social welfare, the market allocation is not optimal and leads to under-investment in prevention allround. This article considers consumer welfare under conditions of interdependent risks and demonstrates that a monopolistic insurer can internalize the arising externalities by setting appropriate prevention incentives through insurance premiums. A monopoly insurance solution reduces not only costs of risk selection, but can also play an important role in loss-prevention. --
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Bibliographic InfoPaper provided by University of Hamburg, Institute for Risk and Insurance in its series Working Papers on Risk and Insurance with number 16.
Date of creation: 2005
Date of revision:
externalities; insurance monopoly; Nash equilibrium; social welfare;
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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