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Overconfidence, Insurance and Paternalism

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  • Sandroni, Alvaro
  • Squintani, Francesco

Abstract

It is well known that when agents are fully rational, compulsory public insurance may make all agents better off in the Rothschild and Stiglitz (1976) model of insurance markets. We find that when sufficiently many agents underestimate their personal risks, compulsory insurance makes low-risk agents worse off. Hence, behavioral biases may weaken some of the well-established rationales for government intervention based on asymmetric information.

Suggested Citation

  • Sandroni, Alvaro & Squintani, Francesco, 2007. "Overconfidence, Insurance and Paternalism," Economics Discussion Papers 8914, University of Essex, Department of Economics.
    • Handle: RePEc:esx:essedp:8914
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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