Behavioral Economics and Insurance Law: The Importance of Equilibrium Analysis

Published in: Doron Teichman & Eyal Zamir (eds.), Oxford Handbook of Behavioral Economics and the Law (2014)

28 Pages Posted: 28 Jan 2014 Last revised: 9 Nov 2015

See all articles by Tom Baker

Tom Baker

University of Pennsylvania Carey Law School

Peter Siegelman

University of Connecticut - School of Law

Date Written: May 1, 2013

Abstract

Because choosing insurance requires consumers to assess risks and probabilities, the demand for insurance has proven to be fertile ground for identifying deviations from rational behavior. Consumers often shun the insurance against large losses that they rationally should want (e.g., floods); and they are attracted to insurance against small losses (extended warranties, low deductibles) that no rational individual should purchase. But the welfare consequences of behavioral anomalies in insurance are complex, because consumers’ irrational behavior takes place in a market profoundly shaped by informational asymmetries. Under some conditions, deviations from rational behavior may actually generate insurance market equilibria that produce greater welfare than would be achieved in a market in which all consumers are rational. We summarize the literature and discuss the legal and policy implications of this conclusion.

Keywords: Insurance, law & economics, rational behavior, informational asymmetry, equilibrium

JEL Classification: D53, D82, G22, K12

Suggested Citation

Baker, Tom and Siegelman, Peter, Behavioral Economics and Insurance Law: The Importance of Equilibrium Analysis (May 1, 2013). Published in: Doron Teichman & Eyal Zamir (eds.), Oxford Handbook of Behavioral Economics and the Law (2014), Available at SSRN: https://ssrn.com/abstract=2386158

Tom Baker (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-2185 (Phone)

HOME PAGE: http://www.law.upenn.edu/cf/faculty/thbaker/

Peter Siegelman

University of Connecticut - School of Law ( email )

65 Elizabeth Street
Hartford, CT 06105
United States
860-570-5238 (Phone)
860-570-5242 (Fax)

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