Self-protection and insurance with interdependencies
We study optimal investment in self-protection of insured individuals when they face interdependencies in the form of potential contamination from others. If individuals cannot coordinate their actions, then the positive externality of investing in self-protection implies that, in equilibrium, individuals underinvest in self-protection. Limiting insurance coverage through deductibles or selling 'at-fault' insurance can partially internalize this externality and thereby improve individual and social welfare.
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- Ian Ayres & Steven D. Levitt, 1997.
"Measuring Positive Externalities from Unobservable Victim Precaution: An Empirical Analysis of Lojack,"
NBER Working Papers
5928, National Bureau of Economic Research, Inc.
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