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

François Pannequin and Anne Corcos ()
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Anne Corcos: CURAPP; Université de Picardie Jules Verne,

No 2017-78, Working Papers from Center for Research in Economics and Statistics

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.

Keywords: self-insurance; compulsory insurance; risk attitudes; risk-lovers (search for similar items in EconPapers)
JEL-codes: D11 D86 G22 K32 L51 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2017-08-01
New Economics Papers: this item is included in nep-ias, nep-mic and nep-rmg
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