Internalizing externalities of loss-prevention through insurance monopoly: An analysis of interdependent risks
When risks are interdependent, loss-prevention activities of one agent influence the risks faced by others. The social return to an investment in loss-prevention is greater than the private return. From a perspective of social welfare, the market allocation is not optimal and leads to under-investment in prevention allround. This article considers consumer welfare under conditions of interdependent risks and demonstrates that a monopolistic insurer can internalize the arising externalities by setting appropriate prevention incentives through insurance premiums. A monopoly insurance solution reduces not only costs of risk selection, but can also play an important role in loss-prevention.
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| Date of creation: | 2005 |
| Date of revision: | |
| Handle: | RePEc:zbw:hzvwps:16 |
| Contact details of provider: | Web page: http://www.hzv-uhh.de/ More information through EDIRC
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References listed on IDEAS
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- Mario Jametti & Thomas von Ungern-Sternberg, 2003.
"Assessing the Efficiency of an Insurance Provider - A Measurement Error Approach,"
CESifo Working Paper Series
928, CESifo Group Munich.
- Mario Jametti & Thomas Ungern-Sternberg, 2005. "Assessing the Efficiency of an Insurance Provider—A Measurement Error Approach," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 30(1), pages 15-34, June.
- Mario Jametti & Thomas von Ungern-Sternberg, 2005. "Assessing the Efficiency of an Insurance Provider—A Measurement Error Approach," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 30(1), pages 15-34, June.
- Mario JAMETTI & Thomas VON UNGERN-STERNBERG, 2003. "Assessing the Efficiency of an Insurance Provider - A Measurement Error Approach," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 03.05, Université de Lausanne, Faculté des HEC, DEEP.
- Brito, Dagobert L. & Sheshinski, Eytan & Intriligator, Michael D., 1991. "Externalities and compulsary vaccinations," Journal of Public Economics, Elsevier, vol. 45(1), pages 69-90, June.
- Harris Schlesinger & Emilio Venezian, 1986. "Insurance Markets with Loss-Prevention Activity: Profits, Market Structure, and Consumer Welfare," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 227-238, Summer.
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