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Internalizing externalities of loss-prevention through insurance monopoly: An analysis of interdependent risks

  • Hofmann, Annette
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    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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    File URL: http://econstor.eu/bitstream/10419/54208/1/680533761.pdf
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    Paper provided by University of Hamburg, Institute for Risk and Insurance in its series Working Papers on Risk and Insurance with number 16.

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    Date of creation: 2005
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    Handle: RePEc:zbw:hzvwps:16
    Contact details of provider: Web page: http://www.hzv-uhh.de/

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    1. 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.
    2. 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.
    3. 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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