Overconfidence, Insurance and Paternalism

Alvaro Sandroni and Francesco Squintani ()

Economics Discussion Papers from University of Essex, Department of Economics

Abstract: It is well known that when agents are fully rational, compulsory public insurance may make all agents better off in the Rothschild and Stiglitz (1976) model of insurance markets. We find that when sufficiently many agents underestimate their personal risks, compulsory insurance makes low-risk agents worse off. Hence, behavioral biases may weaken some of the well-established rationales for government intervention based on asymmetric information.

Date: 2007
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