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

Annette Hofmann ()

The Geneva Papers on Risk and Insurance Theory, 2007, vol. 32, issue 1, 91-111

Abstract: When risks are interdependent, an agent’s decision to self-protect affects the loss probabilities faced by others. Due to these externalities, economic agents invest too little in prevention relative to the socially efficient level by ignoring marginal external costs or benefits conferred on others. This paper analyzes an insurance market with externalities of loss prevention. It is shown in a model with heterogenous agents and imperfect information that a monopolistic insurer can achieve the social optimum by engaging in premium discrimination. An insurance monopoly reduces not only costs of risk selection, but may also play an important social role in loss prevention. Copyright The Geneva Association 2007

Keywords: Externalities; Insurance monopoly; Nash equilibrium; Social welfare; C70; D62; G22 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (11)

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DOI: 10.1007/s10713-007-0004-2

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