Friday, May 2, 2014

Automobile Insurance Incentives

In terms of choosing to purchase or not purchase automobile insurance - even though it is required by state law, the rational criminal will weight the costs and benefits at the margin to determine if it is "worth it" to purchase the insurance.  Typically, the cost is a fine and that may be less than the annual liability insurance policy.  Thus the individual weights the probability of being caught and the fine plus court costs against the costs of the insurance.  If the former is less than the latter, then the individual rationally chooses to not purchase automobile insurance.  This is exactly what the rational choice crime model proposes, and what you will find in this Wall Street Journal article on uninsured drivers.

The article goes forward with how to change the policies so that the costs of not purchasing insurance rise or the benefits of suing without automobile insurance fall, all designed to increase the number of individuals choosing automobile insurance.

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