Self-Protection and Insurance with Interdependencies
Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)
University of Pennsylvania - The Wharton School - Center for Risk Management; National Bureau of Economic Research (NBER); University of Pennsylvania - Operations & Information Management Department
NBER Working Paper No. w12827
We study optimal investment in self-protection of insured individuals when they face interdependencies in the form of potential contamination from others. If individuals cannot coordinate their actions, then the positive externality of investing in self-protection implies that, in equilibrium, individuals underinvest in self-protection. Limiting insurance coverage through deductibles can partially internalize this externality and thereby improve individual and social welfare.
Number of Pages in PDF File: 22working papers series
Date posted: January 12, 2007
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