Citation

Cummins JD, Weiss MA. J. Risk Insur. 1993; 60(2): 230-264.

Copyright

(Copyright © 1993, American Risk and Insurance Association, Publisher John Wiley and Sons)

DOI

10.2307/252906

PMID

unavailable

Abstract

This article presents a rigorous analysis of no-fault automobile insurance in terms of stochastic dominance theory. In the baseline case, with identical drivers and actuarially fair insurance, no-fault is stochastically dominant as long as the no-fault insurance premium exceeds the tort premium. In this case, no-fault brings a higher proportion of accident costs under insurance, increasing driver welfare. When expense charges are introduced (actuarially unfair insurance) no-fault may still be stochastically dominant if the expense charge is less under no-fault, even if no-fault weakens incentives for good driving and leads to higher accident rates. Elective no-fault is unlikely to reduce auto insurance costs, because drivers with high propensities toward moral hazard are likely to retain their right to sue by choosing tort.