Working Paper: NBER ID: w10341
Authors: Steven Shavell
Abstract: Minimum asset and liability insurance requirements must often be met in order for parties to participate in potentially harmful activities. Such financial responsibility requirements may improve parties' decisions whether to engage in harmful activities and, if so, their efforts to reduce risk. However, the requirements may undesirably prevent some parties with low assets from engaging in activities. Liability insurance requirements tend to improve parties' incentives to reduce risk when insurers can observe levels of care, but dilute incentives to reduce risk when insurers cannot observe levels of care. In the latter case, compulsory liability insurance may be inferior to minimum asset requirements.
Keywords: No keywords provided
JEL Codes: D00; K13; K20; L5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Minimum asset requirements (G19) | improved decisions about engaging in harmful activities (D91) |
| Minimum asset requirements (G19) | stronger incentives to reduce risk (G52) |
| Compulsory liability insurance (G22) | improved incentives to reduce risk when insurers can observe care (G52) |
| Compulsory liability insurance (G22) | diluted incentives to reduce risk when insurers cannot observe care (G52) |
| Optimal asset requirement (G11) | balance between preventing low-asset individuals from engaging in harmful activities and preventing beneficial activities (D14) |
| Minimum asset requirements (G19) | social welfare outcomes (I38) |