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Compulsory insurance and voluntary self-insurance: substitutes or complements? A matter of risk attitudes

Author

Listed:
  • François Pannequin

    (CREST; Ecole Normale Supérieure Paris-Saclay)

  • Anne Corcos

    (CURAPP; Université de Picardie Jules Verne,)

Abstract

Based on Ehrlich and Becker’s model (1972) on insurance and self-insurance substitutability, we study the effects of a compulsory partial insurance on self-insurance decisions of both risk-averters and (mixed) risk-lovers. We show that when insurance is compulsory, risk-averters adjust (by substituting) their self-insurance behavior to compensate for the level (too high or too low) of the compulsory coverage level. By contrast, even though they would refuse to invest in any voluntarily hedging scheme, (mixed) risk-lovers freely invest in self-insurance to complete a compulsory partial insurance coverage. Moreover, we prove that for a (mixed) risk-lover, an increase in the partial compulsory insurance coverage induces simultaneously a rise of the self-insurance marginal benefit and a decrease of its marginal cost. Therefore, while compulsory insurance and self-insurance are substitutes for risk-averters, they are complements for (mixed) risk-lovers. This last result brings an unexpected justification for compulsory insurance policies.

Suggested Citation

  • François Pannequin & Anne Corcos, 2017. "Compulsory insurance and voluntary self-insurance: substitutes or complements? A matter of risk attitudes," Working Papers 2017-78, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2017-78
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    self-insurance; compulsory insurance; risk attitudes; risk-lovers;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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