6 Of Burning Houses and Exploding Coke BottlesRead more at location 1250
Note: 6@@@@@@@@@@@@@@@@@ UN ESTERNALITÀ PARTICOLARE: IL RISCHIO REGOLE SULL AZZARDO MORALE COME FUNZIONA L ASSICURAZIONE. POOLING PROBLEMA: AZZARDO MORALE. COSTO NETTO (VEDI FURTO) RISCHIO SUI PRODOTTI: CHI PUÒ EVITARE MEGLIO L AZZARDO MORALE? FRANCHIGIE PRECAUZIONI REGOLA: METTERE IL RISCHIO SU CHI 1) PUÒ ADOTTRARE LE PRECAUZIONI PIÙ ECONOMICHE 2) PUÒ PROPORRE CONTRATTI Edit
When, on a hot summer day, a Coke bottle does a plausible imitation of a hand grenade, product liability law determines whether you or Coca-Cola pays the cost of removing fragments of glass from your skin.Read more at location 1252
There is one chance in a hundred that my house will burn down this year, costing me $100,000. I go to an insurance company to buy insurance on the house. The company agrees with my estimate of the odds and concludes that, on average, it will end up paying out $1,000 on the policy. In addition to paying out on claims, the insurance company also has to pay salaries, rent on its office, and the like, so it offers to insure my house for one year at a price of $1,100. On average I am paying out a hundred dollars more than I am getting back, so why should I buy the insurance? The answer is that a dollar is not a dollar is not a dollar. If my house burns down, I am going to be much poorer than if it doesn’t, hence dollars will be worth much more to me.Read more at location 1259
Why is the insurance company willing to sell it? If the stockholders of the insurance company have the same pattern of tastes as I do, less value for additional dollars the more of them they have, why are they willing to accept my risk? The answer is that transferring risk does not eliminate it, but pooling risk does. With a large number of policies most of the uncertainty averages out. The insurance company that insures a hundred thousand houses can predict with considerable confidence that it will have to pay out on about a thousand fires a year.Read more at location 1268
To begin with, it makes it sound as though risk preference is a statement about your taste for the excitement of risk, when it is actually a statement about how the value of money to you varies with the amount of it you have.Read more at location 1291
There is nothing logically inconsistent about someone who both buys fire insurance and jumps out of airplanes for fun. The cautious skydiver has both declining marginal utility of income and a taste for thrills.Read more at location 1292
A further problem is that what we call risk aversion is really aversion to monetary risks. The fact that one more dollar is worth less to you the more you have does not mean that the same pattern holds for things other than dollars.Read more at location 1294
Shortly after getting married you discover that you are suffering from a rare and very serious medical problem. If you do nothing about it, you can expect to die in about fifteen years. The alternative is a medical procedure that gives you a 50 percent chance of living for another thirty years—and a 50 percent chance of never waking up from the operation. Measured in life expectancy, it is a fair gamble—on average you will live for another fifteen years either way. Whether you take the gamble depends on how the value of additional years depends on how many you have. Suppose you very much want to have children—but only if you are going to live long enough to bring them up. Your choice is between a certainty of fifteen years without children and a 50 percent chance of thirty years with them. You grit your teeth, take several deep breaths, and arrange for the operation. I have just described someone who is a risk preferrer measured in years of life,Read more at location 1296
He might simultaneously be a risk averter when it was a matter of insuring his house. “Risk averse” is not a statement about tastes for risk but about tastes for outcomes.Read more at location 1304
The problem of moral hazard does not imply that insurance should not exist, but it does imply that insurance companies should and will try to design their policies in ways that reduce the problem. One way of doing so is to specify precautions the insured must take, such as installing an adequate sprinkler system.Read more at location 1330
Another is for the insurance company itself to pay for some precautions, such as inspections.Read more at location 1332
A less direct approach is coinsurance. The insurance company insures the factory for only part of its value. The lower the fraction insured, the more precautions it is in the interest of the owner to take.Read more at location 1333
A legal rule that makes Coca-Cola responsible if a Coke bottle blows up is, in effect, mandatory insurance; Coca-Cola is insuring its customer against that particular risk. One disadvantage is that doing so reduces your incentive to be careful not to shake warm bottles of Coke. One advantage is that it increases Coca-Cola’s incentive to improve the quality control on their bottles.Read more at location 1385
Sellers with cars in good condition could solve the problem by providing guarantees—any repairs in the first year to be paid by the seller. Their willingness to offer such guarantees would demonstrate that they believe their own claims about the car’s condition. Unfortunately, while a guarantee eliminates inefficiency due to adverse selection, it creates inefficiency due to moral hazard. The buyer, knowing that someone else will pay for repairs, has an inefficiently low incentive to take good care of the car.Read more at location 1414
A friend of mine who was looking for a used car devised an ingenious way of inducing sellers to reveal their private information. Having located a car he liked, he asked the seller if he was willing, for an additional payment, to provide a one-year guarantee. The seller declined. My friend continued looking. Eventually he found a car he liked whose seller was prepared to sell him a guarantee as well as a car. He bought the car—without the guarantee. This method works only if the seller does not know about it;Read more at location 1420
All three of these cases make sense in terms of one simple rule for allocating risk: Put the incentive where it does the most good. Can you see why?Read more at location 1469
