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An Economic Analysis of Compulsory and Voluntary Insurance

Author

Listed:
  • Kazuhiko Sakai

    () (Kurume University)

  • Mahito Okura

    () (Nagasaki University)

Abstract

This research analyzes an insurance market in which compulsory and voluntary insurance coexist. In particular, we investigate whether compulsory insurance provides an incentive to purchase voluntary insurance. The main conclusions of this article are as follows. When only voluntary insurance exists, we find that (1) an individual has a stronger incentive to purchase insurance when his or her future utility is high, (2) whether an individual’s incentive to purchase insurance becomes stronger when his or her initial wealth increases is ambiguous, and (3) an individual’s incentive to purchase insurance tends to become stronger when his or her initial wealth increases if both effort levels to lower the accident probabilities of individual in the case of higher and lower insurance coverage rates are relatively high. When both insurance coexist, we find that (1) when the compulsory insurance coverage rate is relatively low such that an individual may become personally bankrupt, introducing compulsory insurance increases the incentive to purchase voluntary insurance, (2) an increase in the coverage rate of compulsory insurance increases the incentive to purchase voluntary insurance when the compulsory insurance coverage rate is relatively low, and (3) when the compulsory insurance coverage rate is relatively high such that an individual never becomes personally bankrupt, introducing compulsory insurance does not provide an incentive to purchase voluntary insurance.

Suggested Citation

  • Kazuhiko Sakai & Mahito Okura, 2012. "An Economic Analysis of Compulsory and Voluntary Insurance," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(2), pages 1-8, April.
  • Handle: RePEc:hur:ijaraf:v:2:y:2012:i:2:p:1-8
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    References listed on IDEAS

    as
    1. Petretto, Alessandro, 1999. "Optimal social health insurance with supplementary private insurance," Journal of Health Economics, Elsevier, vol. 18(6), pages 727-745, December.
    2. Mark V. Pauly, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 44-62.
    3. Steven Shavell, 1982. "On Liability and Insurance," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 120-132, Spring.
    4. Hoel, Michael & Iversen, Tor, 2002. "Genetic testing when there is a mix of compulsory and voluntary health insurance," Journal of Health Economics, Elsevier, vol. 21(2), pages 253-270, March.
    5. Dieter Balkenborg, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment," American Economic Review, American Economic Association, vol. 91(3), pages 731-738, June.
    6. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 541-562.
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    Citations

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    Cited by:

    1. Zhang, Peilu & Palma, Marco A., 2018. "Compulsory versus Voluntary Insurance: An Online Experiment," 2018 Annual Meeting, August 5-7, Washington, D.C. 274047, Agricultural and Applied Economics Association.

    More about this item

    Keywords

    Compulsory insurance; voluntary insurance; economic analysis; incentive;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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