Liability Insurance and Choice of Cars: A Large Game Approach

Sjur Didrik Flåm and Elmar Wolfstetter

Journal of Public Economic Theory, 2015, vol. 17, issue 6, 943-963

Abstract: If a car, already on the road, is replaced by another one, more expensive to collide with, a negative externality spills over to other drivers. This paper studies such externalities, relating them to insurance and incentives. It formalizes links from liability rules to choice of car. By assumption, insurance is cooperative but car acquisition is noncooperative. Construing drivers' interaction as a large game, the paper considers how a Nash equilibrium—and its efficiency or fairness—is shaped by the underlying liability regime.

Date: 2015
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