Market Insurance, Self-Insurance, and Self-Protection
27 Pages Posted: 7 Feb 2007
The article develops a theory of demand for insurance that emphasizes the interaction between market insurance, self-insurance, and self- rotection. The effects of changes in prices, income, and other variables on the demand for these alternative forms of insurance are analyzed using the state preference approach to behavior under uncertainty. Market insurance and self-insurance are shown to be substitutes, but market insurance and self-protection can be complements. The analysis challenges the notion that moral hazard is an inevitable consequence of market insurance, by showing that under certain conditions the latter may lead to a reduction in the probabilities of hazardous events.
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