Self-Protection and Insurance with Interdependencies
22 Pages Posted: 12 Jan 2007 Last revised: 8 May 2012
Date Written: January 2007
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.
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