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Wealth Effects on Self-insurance

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  • Kangoh Lee

    (Department of Economics, San Diego State University, 5500 Campanile Drive, San Diego, CA 92182-4485, U.S.A.)

Abstract

This paper considers the wealth effects on self-insurance investment that reduces loss. Wealthier individuals can bear the risk better, and invest less in self-insurance with two states of the world. Self-insurance, like insurance, is thus an inferior good. This known result does not extend to many states. The reason is that an increase in self-insurance does not necessarily reduce final wealth in good states and increase it in bad states. Self-insurance thus may not act as insurance, and wealthier individuals may not necessarily invest less in self-insurance. The paper proposes a condition under which self-insurance is inferior, and a condition under which it is normal.

Suggested Citation

  • Kangoh Lee, 2010. "Wealth Effects on Self-insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 35(2), pages 160-171, December.
    • Handle: RePEc:pal:genrir:v:35:y:2010:i:2:p:160-171
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    Cited by:

    1. Courbage, Christophe & Rey, Béatrice & Treich, Nicolas, 2013. "Prevention and precaution," TSE Working Papers 13-445, Toulouse School of Economics (TSE).
    2. Sarah Bensalem, 2020. "Self-insurance and Non-concave Distortion Risk Measures," Working Papers hal-02936349, HAL.

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