Self-Protection and Insurance with Interdependencies

Muermann, Alexander; Kunreuther, Howard

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Self-Protection and Insurance with Interdependencies

NBER Working Paper No. w12827

22 Pages Posted: 12 Jan 2007 Last revised: 21 Jul 2022

See all articles by Alexander Muermann

Alexander Muermann

WU (Vienna University of Economics and Business); Vienna Graduate School of Finance (VGSF)

Howard Kunreuther

National Bureau of Economic Research (NBER); University of Pennsylvania - Wharton Risk Management and Decision Processes Center

Date Written: January 2007

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.

Suggested Citation: Suggested Citation

Muermann, Alexander and Kunreuther, Howard C. and Kunreuther, Howard C., Self-Protection and Insurance with Interdependencies (January 2007). NBER Working Paper No. w12827, Available at SSRN: https://ssrn.com/abstract=956866