Wealth effects on self-insurance

Abstract

This paper considers the wealth effects on self-insurance investment that reduces loss. Wealthier individuals can bear the risk better, and invest less in self-insurance with two states of the world. Self-insurance, like insurance, is thus an inferior good. This known result does not extend to many states. The reason is that an increase in self-insurance does not necessarily reduce final wealth in good states and increase it in bad states. Self-insurance thus may not act as insurance, and wealthier individuals may not necessarily invest less in self-insurance. The paper proposes a condition under which self-insurance is inferior, and a condition under which it is normal. © 2010 The International Association for the Study of Insurance Economics.