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Self-protection and insurance with interdependencies

  • Kunreuther, Howard
  • Muermann, Alexander
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    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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    File URL: http://econstor.eu/bitstream/10419/25523/1/538467959.PDF
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    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2007/22.

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    Date of creation: 2007
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    Handle: RePEc:zbw:cfswop:200722
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    1. Harry W. Richardson & Peter Gordon & James E. Moore II (ed.), 2005. "The Economic Impacts of Terrorist Attacks," Books, Edward Elgar, number 3783, March.
    2. Shavell, Steven, 1991. "Individual precautions to prevent theft: Private versus socially optimal behavior," International Review of Law and Economics, Elsevier, vol. 11(2), pages 123-132, September.
    3. von Ungern-Sternberg, Thomas, 1996. "The limits of competition: Housing insurance in Switzerland," European Economic Review, Elsevier, vol. 40(3-5), pages 1111-1121, April.
    4. 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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