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Self-Protection and Insurance with InterdependenciesAlexander MuermannVienna University of Economics and Business; Vienna Graduate School of Finance (VGSF) Howard KunreutherUniversity of Pennsylvania - The Wharton School - Center for Risk Management; National Bureau of Economic Research (NBER); University of Pennsylvania - Operations & Information Management Department January 2007 NBER Working Paper No. w12827 Abstract: 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: 22 working papers seriesDate posted: January 12, 2007Suggested CitationContact Information
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