Abstract
We here develop a model in order to study the effect of altruism on individuals' insurance decisions. The main question is if the potential strategic incentive to free ride on others' altruism can lead to insurance market failure. One relevant concern is whether there will be any transfers at all in a large economy, even with altruistic individuals, since the incentive to give may be weakened as the population grows - altruists free-riding on each other. Our main results indicate that altruism can have a detrimental effect on insurance markets in a setting where the individuals are identical. If, however, individuals differ much as to the health risk, and these individual risks are observed by the insurers, then we find that the degree of altruism must be (perhaps unrealistically) high in order for altruism to cause insurance market failure. A more complex pattern is found in the case of asymmetric information: low levels of altruism increases the number of equilibria, as compared with the case without altruism, while high levels of altruism knocks out all insurance equilibria.