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The Welfare Implications of Moral Hazard and Adverse Selection in Competitive Insurance Markets

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  • Stewart, Jay

Abstract

The author models a competitive insurance market with both moral hazard and adverse selection, and analyzes the effect on welfare when both problems are present simultaneously. An examination of the interaction between these two problems leads to two hypotheses: the nature of the equilibrium contracts is such that each problem partially offsets the welfare loss associated with the other and the degree to which this occurs increases as agents become more heterogeneous. Simulation results overwhelmingly support both hypotheses. Copyright 1994 by Oxford University Press.

Suggested Citation

  • Stewart, Jay, 1994. "The Welfare Implications of Moral Hazard and Adverse Selection in Competitive Insurance Markets," Economic Inquiry, Western Economic Association International, vol. 32(2), pages 193-208, April.
    • Handle: RePEc:oup:ecinqu:v:32:y:1994:i:2:p:193-208
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    Cited by:

    1. M.-C. Fagart & B. Kambia-Chopin, 2002. "Aléa moral et sélection adverse sur le marché de l’assurance," THEMA Working Papers 2002-09, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    2. John Addison & Richard Barrett & W. Siebert, 2006. "Building blocks in the economics of mandates," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 5(2), pages 69-87, August.
    3. Bruno Jullien & Bernard Salanié & François Salanié, 2000. "Screening Risk-Averse Agents Under Moral Hazard," Working Papers 2000-41, Center for Research in Economics and Statistics.
    4. Islam, Zahirul & Turvey, Calum G. & Hoy, Michael, 1999. "A Model Of Agricultural Insurance In Evaluating Asymmetric Information Problems," Working Papers 34103, University of Guelph, Department of Food, Agricultural and Resource Economics.
    5. Adeyemi Esuola & Michael Hoy & Zahirul Islam & Calum G. Turvey, 2007. "Evaluating the effects of asymmetric information in a model of crop insurance," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 67(2), pages 341-356, November.
    6. Jay Stewart, 1999. "Adverse Selection and Pay Compression," Southern Economic Journal, John Wiley & Sons, vol. 65(4), pages 885-899, April.
    7. Bradley S. Wimmer & Brian Chezum, 2006. "Adverse Selection, Seller Effort, and Selection Bias," Southern Economic Journal, John Wiley & Sons, vol. 73(1), pages 201-218, July.
    8. Roland Bénabou & Jean Tirole, 2016. "Bonus Culture: Competitive Pay, Screening, and Multitasking," Journal of Political Economy, University of Chicago Press, vol. 124(2), pages 305-370.
    9. Nick Netzer & Florian Scheuer, 2010. "Competitive screening in insurance markets with endogenous wealth heterogeneity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(2), pages 187-211, August.
    10. Huennemeyer, Anne-Juliane & Rollins, Kimberly S., 2001. "Private Resource Management And Public Trust: Optimal Resource Conservation Contracts Under Asymmetric Information," Working Papers 34141, University of Guelph, Department of Food, Agricultural and Resource Economics.
    11. Gürtler, Marc & Koch, Florian, 2021. "Multidimensional skin in the game," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    12. Mourad Afif & Sandrine Spaeter, 2010. "Adverse Selection, Emission Permits and Optimal Price Differentiation," Working Papers of BETA 2010-07, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    13. Kambia-Chopin, Bidénam, 2003. "Coûts de l’autoprotection et équilibre d’un marché de l’assurance concurrentiel," L'Actualité Economique, Société Canadienne de Science Economique, vol. 79(3), pages 327-347, Septembre.
    14. Addison, John T. & Barrett, Charles Richard & Siebert, William Stanley, 1998. "Mandated benefits, welfare, and heterogeneous firms," ZEW Discussion Papers 98-46, ZEW - Leibniz Centre for European Economic Research.
    15. Murtarelli, Grazia & Gregory, Anne & Romenti, Stefania, 2021. "A conversation-based perspective for shaping ethical human–machine interactions: The particular challenge of chatbots," Journal of Business Research, Elsevier, vol. 129(C), pages 927-935.
    16. Sandrine Ollier, 2006. "Un effet pervers de la responsabilité limitée," Recherches économiques de Louvain, De Boeck Université, vol. 72(3), pages 265-286.
    17. Dionne, Georges & Fombaron, Nathalie & Doherty, Neil, 2012. "Adverse selection in insurance contracting," Working Papers 12-8, HEC Montreal, Canada Research Chair in Risk Management.
    18. Bruno Jullien & Bernard Salanié & François Salanié, 2007. "Screening risk-averse agents under moral hazard: single-crossing and the CARA case," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(1), pages 151-169, January.
    19. Udo Schneider & Jürgen Zerth, 2011. "Improving Prevention Compliance through Appropriate Incentives: Theoretical Modelling and Empirical Evidence," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 147(I), pages 71-106, March.
    20. Jay Stewart, 1999. "Adverse Selection and Pay Compression," Southern Economic Journal, Southern Economic Association, vol. 65(4), pages 885-899, April.
    21. Jay Stewart, 1999. "Adverse Selection and Pay Compression," Southern Economic Journal, John Wiley & Sons, vol. 65(4), pages 885-899, April.
    22. Udo Schneider, 2005. "Asymmetric Information and Outcome-based Compensation in Health Care – Theoretical Implications," HEW 0501006, University Library of Munich, Germany.
    23. Schneider, Udo & Zerth, Jürgen, 2008. "Improving prevention compliance through appropriate incentives," MPRA Paper 8280, University Library of Munich, Germany.

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