Abstract
Abstract Some people have optimistic expectations regarding their accident probability, and thus, refrain from purchasing adequate insurance. This study investigates how insurance firms use advertisements to lower the ratio of optimistic individuals in the market. The main results are as follows: first, the optimal level of advertisements is maximized when the insurance premium is moderate. Second, the maximum level of advertisement varies according to the degree of optimism, which is measured by the difference between accurate and optimistic accident probabilities. Third, the advertisement decision is affected by the free-rider problem, and the equilibrium number of insurance firms with advertisement is always larger than that of firms without advertisement in a competitive insurance market.
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