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Price Adjustment in an Automobile Insurance Market: A Test of the Sheshinski-Weiss Model

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  • Bev Dahlby

Abstract

Nominal price rigidity is explained in the Sheshinski-Weiss (SW) model by costly price adjustment. The predictions of the SW model, which describe a firm's optimal forward-looking price adjustment strategy, were derived and tested using microdata on the timing and the magnitude of premium changes by sixty-nine firms in the Alberta automobile insurance market over the period 1974-82. The model was tested by estimating the structural equations of the model, probit equations for premium changes, and reduced-form equations for the firm's new premium and its old premium. The overall conclusion is that the SW model does not explain the price adjustments observed in the Alberta automobile insurance market.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 25 (1992)
Issue (Month): 3 (August)
Pages: 564-83

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Handle: RePEc:cje:issued:v:25:y:1992:i:3:p:564-83

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Postal: Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4
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Citations

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Cited by:
  1. Gautier, E., 2008. "Les ajustements microéconomiques des prix : une synthèse des modèles théoriques et résultats empiriques," Working papers 211, Banque de France.
  2. Simon Hall & Mark Walsh & Anthony Yates, 1997. "How do UK companies set prices?," Bank of England working papers 67, Bank of England.
  3. Michael C. Davis & James D. Hamilton, 2003. "Why Are Prices Sticky? The Dynamics of Wholesale Gasoline Prices," NBER Working Papers 9741, National Bureau of Economic Research, Inc.
  4. O'Reilly, B., 1998. "The Benefits of Low Inflation: Taking Shock "A nickel ain't worth a dime any more" [Yogi Berra]," Technical Reports 83, Bank of Canada.
  5. Kim Scharf, 1999. "Tax incentives for extraction and recycling of basic materials in Canada," Fiscal Studies, Institute for Fiscal Studies, vol. 20(4), pages 451-477, December.
  6. Asplund, Marcus & Eriksson, Rickard & Friberg, Richard, 2000. " Price Adjustments by a Gasoline Retail Chain," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(1), pages 101-21, March.
  7. J. Konieczny, A. Skrzpacz, 2006. "Search, Costly Price Adjustment and the Frequency of Price Changes - Theory and Evidence," Working Papers eg0054, Wilfrid Laurier University, Department of Economics, revised 2006.
  8. Emmanuel Dhyne & Jerzy Konieczny & Fabio Rumler & Patrick Sevestre, 2009. "Price rigidity in the euro area - An assessment," European Economy - Economic Papers 380, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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