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American Economic Review: Vol. 97 No. 5 (December 2007)


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Overconfidence, Insurance, and Paternalism

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

DOI: 10.1257/aer.97.5.1994


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)

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Sandroni, Alvaro
Squintani, Francesco

American Economic Review

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