American Economic Review Vol. 97 No. 5 2007

Overconfidence, Insurance, and Paternalism

Alvaro Sandroni¹; Francesco Squintani²

¹ Department of Economics, University of Pennsylvania, 3708 Locust Walk, Philadelphia, PA 19104 and Kellogg School of Management, MEDS Department, 2001 Sheridan Rd., Evanston, IL 60208. · ² Università degli Studi di Brescia, Via S. Faustino, 74/B, 25122 Brescia, Italy, Essex University, Wivenhoe Park, Colchester CO4 3SQ, UK, ELSE, University College London, Drayton House, Gordon Street, London WC1H OAN, UK.

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.

DOI

10.1257/aer.97.5.1994

Volume

97

Issue

5

Pages

1994-2004

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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