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Self-protection and insurance with interdependencies

Author

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  • Kunreuther, Howard
  • Muermann, Alexander

Abstract

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.

Suggested Citation

  • Kunreuther, Howard & Muermann, Alexander, 2007. "Self-protection and insurance with interdependencies," CFS Working Paper Series 2007/22, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:200722
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    File URL: https://www.econstor.eu/bitstream/10419/25523/1/538467959.PDF
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    References listed on IDEAS

    as
    1. Harry W. Richardson & Peter Gordon & James E. Moore II (ed.), 2005. "The Economic Impacts of Terrorist Attacks," Books, Edward Elgar Publishing, number 3783.
    2. 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.
    3. Ian Ayres & Steven D. Levitt, 1998. "Measuring Positive Externalities from Unobservable Victim Precaution: An Empirical Analysis of Lojack," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 43-77.
    4. 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.
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    Cited by:

    1. Alexander Muermann & Howard Kunreuther, 2008. "Self-protection and insurance with interdependencies," Journal of Risk and Uncertainty, Springer, vol. 36(2), pages 103-123, April.

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    More about this item

    Keywords

    Externality; Mitigation; Insurance;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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