THE STOCHASTIC-DOMINANCE OF NO-FAULT AUTOMOBILE INSURANCE

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 fight to sue by choosing tort.