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Miles, Speed and Technology: Traffic Safety under Oligopolistic Insurance

Author

Listed:
  • Maria Dementyeva

    (VU University Amsterdam, the Netherlands)

  • Erik T. Verhoef

    (VU University Amsterdam, the Netherlands)

Abstract

This paper studies road safety and accident externalities when insurance companies have market power, and can influence road users' driving behaviour via insurance premiums. We obtain both welfare and profit maximizing marginal conditions for first- and second-best insurance premiums for monopoly and oligopoly market structures in insurance. The insurance program consists of an insurance premium, and marginal dependencies ("slopes") of that premium on speed and on the own safety technology choice. While a private monopolist internalizes accident externalities up to the point where compensations to users' benefit matches the full (immaterial) costs, in oligopolistic markets insurance firms do not fully internalize accident externalities that their customers impose upon one another. Therefore, non-optimal premiums as well as speed and technology control apply. Analytical results demonstrate how insurance firms' incentives to influence traffic safety deviate from socially optimal incentives.

Suggested Citation

  • Maria Dementyeva & Erik T. Verhoef, 2015. "Miles, Speed and Technology: Traffic Safety under Oligopolistic Insurance," Tinbergen Institute Discussion Papers 15-025/VIII, Tinbergen Institute, revised 08 Mar 2016.
  • Handle: RePEc:tin:wpaper:20150025
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    References listed on IDEAS

    as
    1. Dementyeva, Maria & Koster, Paul R. & Verhoef, Erik T., 2015. "Regulation of road accident externalities when insurance companies have market power," Journal of Urban Economics, Elsevier, vol. 86(C), pages 1-8.
    2. Verhoef, Erik T. & Rouwendal, Jan, 2004. "A behavioural model of traffic congestion: Endogenizing speed choice, traffic safety and time losses," Journal of Urban Economics, Elsevier, vol. 56(3), pages 408-434, November.
    3. Olivier Gossner & Pierre Picard, 2005. "On the Consequences of Behavioral Adaptations in the Cost-Benefit Analysis of Road Safety Measures," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(4), pages 577-599.
    4. Lave, Charles A, 1985. "Speeding, Coordination, and the 55 MPH Limit," American Economic Review, American Economic Association, vol. 75(5), pages 1159-1164, December.
    5. Hultkrantz, Lars & Nilsson, Jan-Eric & Arvidsson, Sara, 2012. "Voluntary internalization of speeding externalities with vehicle insurance," Transportation Research Part A: Policy and Practice, Elsevier, vol. 46(6), pages 926-937.
    6. Ian W. H. Parry & Margaret Walls & Winston Harrington, 2007. "Automobile Externalities and Policies," Journal of Economic Literature, American Economic Association, vol. 45(2), pages 373-399, June.
    7. Alma Cohen & Liran Einav, 2003. "The Effects of Mandatory Seat Belt Laws on Driving Behavior and Traffic Fatalities," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 828-843, November.
    8. Luis Rizzi, 2008. "Integrating Travel Delays, Road Safety, Care, Vehicle Insurance and Cost-Benefit Analysis of Road Capacity Expansion in a Unified Framework," Networks and Spatial Economics, Springer, vol. 8(2), pages 125-140, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Accident externalities; congestion externalities; traffic regulations; road safety; second-best; market power;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

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