Consumption externality and equilibrium underinsurance

Rachel J. Huang, Larry Y. Tzeng

Research output: Contribution to journalArticlepeer-review

4 Scopus citations


Relative consumption has been found to be crucial in many areas, such as asset pricing, the design of taxation, and economic growth. This article extends this line of research to the individual's insurance decision. We first define "keeping up with the Joneses" in the purchase of insurance and find that jealousy does not necessarily give rise to "keeping up with the Joneses." We also identify several sufficient conditions that cause the optimal coverage in the private market to be less than the social optimum (equilibrium underinsurance). Jealousy is found to be neither a sufficient nor a necessary condition for equilibrium underinsurance. We further show that a social welfare maximizing government could adopt a tax system to correct for the consumption externality and make individuals better off.

Original languageEnglish
Pages (from-to)1039-1054
Number of pages16
JournalJournal of Risk and Insurance
Issue number4
StatePublished - Dec 2008


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