National self-insurance and self-protection against adversity: bureaucratic management of security and moral hazard |
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Authors: | Toshihiro Ihori Martin C McGuire |
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Institution: | (1) Private Enterprise Research Center, Texas A&M University, 4231 TAMU, College Station, TX 77843-4231, USA |
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Abstract: | This paper extends existing analyses of self-insurance and self-protection—distinctions first made by Ehrlich and Becker (J
Polit Econ 80:623–648, 1972)—that countries may implement at a national level in pursuit of their security. We show that,
when no market insurance is available, self-insurance alone raises important new issues as to the definition of “fair pricing”
and as to the relations between pricing, optimization, risk aversion, and inferiority that are significantly different from
standard, conventional market analysis. We also discover a hitherto unrecognized tendency for misallocation between self-protection
and self-insurance when both are available and considered together. Because of external effects running from self-protection
to self-insurance, governments ruled by myopic bureaucracies and trying to find the right balance face incentives that encourage
extreme, self-inflicted moral hazard, to the detriment of self-protection. |
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