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Self-protection and insurance with interdependencies

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We study optimal investment in self-protection of insured individuals when they face interdependencies in the form of potential contamination from others. If individuals cannot coordinate their actions, then the positive externality of investing in self-protection implies that, in equilibrium, individuals underinvest in self-protection. Limiting insurance coverage through deductibles or selling at-fault insurance can partially internalize this externality and thereby improve individual and social welfare.

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Howard Kunreuther, Alexander Muermann

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Adapt according to the presented license agreement and reference the original author.