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Voluntary internalization of speeding externalities with vehicle insurance
Örebro University, Örebro University School of Business.ORCID iD: 0000-0003-1172-1076
Örebro University, Örebro University School of Business.
2012 (English)In: Transportation Research Part A: Policy and Practice, ISSN 0965-8564, E-ISSN 1879-2375, Vol. 46, no 6, p. 926-937Article in journal (Refereed) Published
Abstract [en]

High speed is an important determinant of accidents for speeders as well as for other motorists. This paper develops a framework for analyzing instruments that encourage drivers to internalize the full consequences of their behavior with respect to choice of speed using Pay-As-You-Speed (PAYS) insurance, possibly as an extension of Pay-As-You-Drive (PAYD) insurance. We demonstrate how the combination of a Pigovian taxation scheme and PAYS can be designed in a setting involving two principals (the state and an insurance company) that affect the incentives of commuters to choose between driving and other modes of transport and for those that use the car mode to drive carefully. While the government is assumed to maximize overall social efficiency and therefore wants to implement marginal cost pricing, insurance companies do actuarial pricing, i.e. average cost pricing within risk classes that are homogeneous to the degree that the insurers have information about actual behavior. PAYS insurance improves the insurance industry's possibility to differentiate premiums according to behavior and therefore to target risk classes in a better way than today. Moreover, since our framework is designed to accomplish differentiation by self-selection, compulsory regulation is not necessary, although there may be reason for the government to facilitate the implementation of the new technology. 

Place, publisher, year, edition, pages
Elsevier, 2012. Vol. 46, no 6, p. 926-937
Keywords [en]
Pay-As-You-Speed, Pay-As-You-Drive, Usage-based insurance, Intelligent speed adaptation, Transport telematics, Pigou pricing
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:oru:diva-23350DOI: 10.1016/j.tra.2012.02.011ISI: 000304212500005Scopus ID: 2-s2.0-84860161408OAI: oai:DiVA.org:oru-23350DiVA, id: diva2:532296
Available from: 2012-06-11 Created: 2012-06-11 Last updated: 2017-12-07Bibliographically approved

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Hultkrantz, LarsArvidsson, Sara

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