Abstract:

Although it avoids the negative externalities associated with the damages caused by uninsured individuals, compulsory insurance raises the issue of insurance crowding out prevention.  Interestingly, Pannequin and Corcos ((2020)) show that on a theoretical level, although compulsory insurance and self-insurance (prevention investments dedicated to loss reduction) are substitutes for risk averters, they are complementary for risk lovers. The present contribution aims to test, in the Lab, these surprising results using a model-based experimental design. Our experimental results support the theoretical predictions: compulsory insurance and self-insurance are complementary for risk lovers and substitutes for risk averters. This contribution fully supports public policies that aim to implement mandatory insurance. Far from deterring prevention activities and providing that its level is high enough, mandatory insurance increases prevention levels.

Co-authored with A. Corcos, and C. Montmarquette.