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