University of Essex, Department of Economics, Economics Discussion Papers
Abstract
It is well known that when agents are fully rational, compulsory public insurance may make all agents better off in the Rothschild and Stiglitz (1976) model of insurance
markets. We find that when sufficiently many agents underestimate their personal risks, compulsory insurance makes low-risk agents worse off. Hence, behavioral biases
may weaken some of the well-established rationales for government intervention based on asymmetric information
