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Voluntary internalization of speeding externalities with vehicle insurance

Listed author(s):
  • Hultkrantz, Lars
  • Nilsson, Jan-Eric
  • Arvidsson, Sara

High speed is an important determinant of accidents for speeders as well as for other motorists. This paper develops a framework for analyzing instruments that encourage drivers to internalize the full consequences of their behavior with respect to choice of speed using Pay-As-You-Speed (PAYS) insurance, possibly as an extension of Pay-As-You-Drive (PAYD) insurance. We demonstrate how the combination of a Pigovian taxation scheme and PAYS can be designed in a setting involving two principals (the state and an insurance company) that affect the incentives of commuters to choose between driving and other modes of transport and for those that use the car mode to drive carefully. While the government is assumed to maximize overall social efficiency and therefore wants to implement marginal cost pricing, insurance companies do actuarial pricing, i.e. average cost pricing within risk classes that are homogeneous to the degree that the insurers have information about actual behavior. PAYS insurance improves the insurance industry’s possibility to differentiate premiums according to behavior and therefore to target risk classes in a better way than today. Moreover, since our framework is designed to accomplish differentiation by self-selection, compulsory regulation is not necessary, although there may be reason for the government to facilitate the implementation of the new technology.

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File URL: http://www.sciencedirect.com/science/article/pii/S0965856412000298
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Article provided by Elsevier in its journal Transportation Research Part A: Policy and Practice.

Volume (Year): 46 (2012)
Issue (Month): 6 ()
Pages: 926-937

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Handle: RePEc:eee:transa:v:46:y:2012:i:6:p:926-937
DOI: 10.1016/j.tra.2012.02.011
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  1. Alma Cohen & Rajeev Dehejia, 2003. "The Effect of Automobile Insurance and Accident Liability Laws in Traffic Fatalities," NBER Working Papers 9602, National Bureau of Economic Research, Inc.
  2. Hultkrantz, Lars & Lindberg, Gunnar, 2009. "Pay-As-You-Speed: An Economic Field-Experiment," Working Papers 2009:12, Örebro University, School of Business.
  3. Aaron S. Edlin & Pinar Karaca-Mandic, 2004. "The Accident Externality from Driving," Public Economics 0401003, EconWPA.
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  6. Armelius, Hanna & Hultkrantz, Lars, 2006. "The politico-economic link between public transport and road pricing: An ex-ante study of the Stockholm road-pricing trial," Transport Policy, Elsevier, vol. 13(2), pages 162-172, March.
  7. Parry, Ian & Small, Kenneth, 2002. "Does Britain or the United States Have the Right Gasoline Tax?," Discussion Papers dp-02-12-, Resources For the Future.
  8. Parry, Ian W. H., 2004. "Comparing alternative policies to reduce traffic accidents," Journal of Urban Economics, Elsevier, vol. 56(2), pages 346-368, September.
  9. Boyer, M. & Dionne, G. & Vanasse, C., 1990. "Infractions Au Code De La Securite Routiere, Infractions Au Code Criminel, Et Gestion Optimale De La Securite Routiere," Cahiers de recherche 9024, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  10. Ian W. H. Parry, 2005. "Is Pay-as-You-Drive Insurance a Better Way to Reduce Gasoline than Gasoline Taxes?," American Economic Review, American Economic Association, vol. 95(2), pages 288-293, May.
  11. Gunnar Lindberg, 2001. "Traffic Insurance and Accident Externality Charges," Journal of Transport Economics and Policy, University of Bath, vol. 35(3), pages 399-416, September.
  12. Richard Arnott & An Yan, 2000. "The Two-Mode Problem: Second-Best Pricing and Capacity," Boston College Working Papers in Economics 474, Boston College Department of Economics.
  13. Kutzbach, Mark J., 2009. "Motorization in developing countries: Causes, consequences, and effectiveness of policy options," Journal of Urban Economics, Elsevier, vol. 65(2), pages 154-166, March.
  14. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 541-562.
  15. Steven Shavell, 2000. "On the Social Function and the Regulation of Liability Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 25(2), pages 166-179, April.
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