Self-Protection and Insurance with Interdependencies

Alexander Muermann and Howard Kunreuther

No 12827, NBER Working Papers from National Bureau of Economic Research, Inc

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 can partially internalize this externality and thereby improve individual and social welfare.

JEL-codes: C22 D80 G22 H23 (search for similar items in EconPapers)
Date: 2007-01
New Economics Papers: this item is included in nep-ias and nep-pbe
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Published as 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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