Mandatory Third Party Insurance: God, the Devil, and the Details
Berkeley Program in Law and Economics UC Berkeley, Latin American and Caribbean Law and Economics Association (ALACDE) Annual Papers, 2005
29 Pages Posted: 29 Aug 2016
Date Written: April 22, 2005
The study of mandatory insurance systems may be carried out on two different levels. On the one hand, it is possible to analyze theoretical relations between some properties or elements belonging to that class of systems. On the other, given a set of relevant conditions (which determines a particular structure of transaction costs), empirical outcomes of individual systems can be foreseen. Theoretical relations are instrumentally useful in that process. However, although the mandatory purchase of liability insurance is the property or element which characterizes that kind of systems, the theoretical relations derived only from that property or element are not enough to judge the merits of each individual mandatory insurance system as a whole.
Furthermore, from a purely theoretical viewpoint, the duty of insuring brings about fewer consequences than those frequently attributed to such system’s element. For example, neither a significant rise in the amount of insured cars, nor internalization of third party losses, nor lesser delay in paying victims compensations must necessarily follow from that isolated duty. Therefore, it is much more accurate to relate some of those effects to other characteristics of the systems, finer-grained than the legal obligation of contracting insurance coverage. Moreover, associating the duty of insuring with some empirical outcomes in the oversimplified way referred to above, has often been used as one of the arguments to support or reject some public policies of car accident control, which would introduce, at least, some vagueness or inaccuracy.
This work studies a few theoretical relations between some fine-grained elements of mandatory insurance systems underlying the obligation to purchase coverage, from a transaction costs perspective. We conclude that, in relation to a set of empirical conditions typically related to developing societies, it is possible to find relatively preferable an individual system including that kind of obligation. However, this statement does not mean that every individual system imposing mandatory insurance is adequate for that type of real realms, or that the duty of insuring should be discarded for societies of a different kind.
Keywords: mandatory insurance, third party insurance
JEL Classification: K13
Suggested Citation: Suggested Citation