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  3. American Economic Review
  4. December 2007
  5. Overconfidence, Insurance, and Paternalism

Overconfidence, Insurance, and Paternalism

  • Alvaro Sandroni
  • Francesco Squintani
American Economic Review
vol. 97, no. 5, December 2007
(pp. 1994-2004)
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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. (JEL D82, G22)

Citation

Sandroni, Alvaro, and Francesco Squintani. 2007. "Overconfidence, Insurance, and Paternalism." American Economic Review, 97 (5): 1994-2004. DOI: 10.1257/aer.97.5.1994

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • G22 Insurance; Insurance Companies; Actuarial Studies