Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/54208
Authors: 
Hofmann, Annette
Year of Publication: 
2005
Series/Report no.: 
Working Papers on Risk and Insurance 16
Abstract: 
When risks are interdependent, loss-prevention activities of one agent influence the risks faced by others. The social return to an investment in loss-prevention is greater than the private return. From a perspective of social welfare, the market allocation is not optimal and leads to under-investment in prevention allround. This article considers consumer welfare under conditions of interdependent risks and demonstrates that a monopolistic insurer can internalize the arising externalities by setting appropriate prevention incentives through insurance premiums. A monopoly insurance solution reduces not only costs of risk selection, but can also play an important role in loss-prevention.
Subjects: 
externalities
insurance monopoly
Nash equilibrium
social welfare
JEL: 
C70
D62
G22
Document Type: 
Working Paper

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