IDEAS home Printed from https://ideas.repec.org/p/crs/wpaper/2017-78.html
   My bibliography  Save this paper

Compulsory insurance and voluntary self-insurance: substitutes or complements? A matter of risk attitudes

Author

Listed:
  • François Pannequin

    () (CREST; Ecole Normale Supérieure Paris-Saclay)

  • Anne Corcos

    () (CURAPP; Université de Picardie Jules Verne,)

Abstract

Based on Ehrlich and Becker’s model (1972) on insurance and self-insurance substitutability, we study the effects of a compulsory partial insurance on self-insurance decisions of both risk-averters and (mixed) risk-lovers. We show that when insurance is compulsory, risk-averters adjust (by substituting) their self-insurance behavior to compensate for the level (too high or too low) of the compulsory coverage level. By contrast, even though they would refuse to invest in any voluntarily hedging scheme, (mixed) risk-lovers freely invest in self-insurance to complete a compulsory partial insurance coverage. Moreover, we prove that for a (mixed) risk-lover, an increase in the partial compulsory insurance coverage induces simultaneously a rise of the self-insurance marginal benefit and a decrease of its marginal cost. Therefore, while compulsory insurance and self-insurance are substitutes for risk-averters, they are complements for (mixed) risk-lovers. This last result brings an unexpected justification for compulsory insurance policies.

Suggested Citation

  • François Pannequin & Anne Corcos, 2017. "Compulsory insurance and voluntary self-insurance: substitutes or complements? A matter of risk attitudes," Working Papers 2017-78, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2017-78
    as

    Download full text from publisher

    File URL: http://crest.science/RePEc/wpstorage/2017-78.pdf
    File Function: CREST working paper version
    Download Restriction: no

    References listed on IDEAS

    as
    1. Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, vol. 96(1), pages 280-289, March.
    2. Sujoy Chakravarty & Jaideep Roy, 2009. "Recursive expected utility and the separation of attitudes towards risk and ambiguity: an experimental study," Theory and Decision, Springer, vol. 66(3), pages 199-228, March.
    3. Charles N. Noussair & Stefan T. Trautmann & Gijs van de Kuilen, 2014. "Higher Order Risk Attitudes, Demographics, and Financial Decisions," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 325-355.
    4. Jindapon, Paan, 2013. "Do risk lovers invest in self-protection?," Economics Letters, Elsevier, vol. 121(2), pages 290-293.
    5. David Crainich & Louis Eeckhoudt & Alain Trannoy, 2013. "Even (Mixed) Risk Lovers Are Prudent," American Economic Review, American Economic Association, vol. 103(4), pages 1529-1535, June.
    6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    7. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-648, July-Aug..
    8. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    9. repec:kap:expeco:v:20:y:2017:i:4:d:10.1007_s10683-017-9513-8 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    self-insurance; compulsory insurance; risk attitudes; risk-lovers;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:crs:wpaper:2017-78. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sri Srikandan). General contact details of provider: http://edirc.repec.org/data/crestfr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.