Regulation of road accident externalities by insurance companies with market power: an analytical model with endogenous speed and safety technology choice Maria Dementyeva and Erik Verhoef, VU University Amsterdam, and Tinbergen Institute Amsterdam Abstract: Accident externalities are among the most important external costs of road transport, [3]. The negative impact of the road accidents is multiple of that of congestion externalities; yet, it remains under-investigated in the eco- nomic literature. In this work we study the regulation of road safety, when insurance companies have market power, and can influence road users’ strat- egy choices in terms of mileage, investment in car safety for the driver, and speed. The government, in turn, has control over both insurance providers and the drivers. Our model describes a two-stage game between car insurance providers and road users. First, insurance companies maximize their profit with re- spect to insurance premiums, subject to equilibrium constraints. Then, each atomistic road user opts for a safety technology and speed in order to min- imize its generalized costs. This includes time costs, investments into own safety technology, insurance premiums, and a possibly immaterial part of the expected accident costs not covered by the insurance. We assume that an individual’s speed choice does affect both one’s own and other road users’ safety, while the technology affects only the former. Possibly, technology chosen by a driver would partly influence the safety level of all the road users, but distinguishing between a strictly internal safety measures (tech- nology investment) and a combined internal-external safety measure (speed) is helpful for the interpretation of our results. Following the reasoning provided in the papers [1] and [4], we obtain marginal conditions of the first- and second-best solutions. In our model we assume that companies can influence drivers’ behavior via insurance pro- grams. Government then can impose taxes, subsidies on companies and/or road users, fines for speeding over a certain speed limit, and other regu- lations. We consider social and private profit-maximizing monopolies, and competitive markets of the firms playing Nash in Cournot fashion. In line with the earlier literature on airport congestion and private road operation, we find that market power is of key importance when insurance markets are regulated. The discussion on private internalization of external- ities is therefore not only relevant for airport congestion or the operation of private roads, but also impacts optimal road transport pricing when regu- lating the accident externalities related to road use, speeding, and the level of safety technologies, [1]. 1