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The overconfidence problem in insurance markets

Sandroni, A.; Squintani, F.; (2004) The overconfidence problem in insurance markets. (ELSE Working Papers 116). ESRC Centre for Economic Learning and Social Evolution: London, UK. Green open access

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Adverse selection has long been recognized as a rationale for government intervention in in- surance markets and for the adoption of public compulsory insurance. A different rationale for compulsory insurance is that overconfident individuals may underinsure because they underes- timate the relevant risks. We show that government intervention is not a Pareto improvement in an adverse selection model with a significant fraction of overcon�dent agents. We underline that behavioral biases need not be the basis for government intervention. In fact, behavioral biases may overturn existing compelling reasons for intervention in the economy. Our model also delivers novel positive implications on aggregate variables that have been at the center of recent empirical investigation.

Type: Working / discussion paper
Title: The overconfidence problem in insurance markets
Open access status: An open access version is available from UCL Discovery
Publisher version: http://else.econ.ucl.ac.uk/newweb/papers.php
Language: English
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/14568
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