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Cost Function Estimation and Quality Bias: The Regulated Automobile Insurance Industry

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  • Ronald R. Braeutigam
  • Mark V. Pauly
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    Abstract

    This article explores the implications of endogenous product quality (and therefore endogenous output) in the empirical estimation of cost functions for regulated automobile collision insurance firms. It contains a structural model of such a firm and provides an illustration of the types of biases that can result if data on quality of service are unavailable or otherwise omitted. The analysis shows how the directions of biases depend on the nature of the variations in the observed (nonquality) data. A new test suggests that such bias is present in insurance cost functions.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 17 (1986)
    Issue (Month): 4 (Winter)
    Pages: 606-617

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    Handle: RePEc:rje:randje:v:17:y:1986:i:winter:p:606-617

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    Cited by:
    1. Berger, Allen N & Cummins, J David & Weiss, Mary A, 1997. "The Coexistence of Multiple Distribution Systems for Financial Services: The Case of Property-Liability Insurance," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 70(4), pages 515-46, October.
    2. Laura Di Giorgio & Massimo Filippini & Giuliano Masiero, 2014. "The relationship between costs and quality in nonprofit nursing homes," IdEP Economic Papers, USI Università della Svizzera italiana 1402, USI Università della Svizzera italiana.
    3. Wholey, Douglas & Feldman, Roger & Christianson, Jon B. & Engberg, John, 1996. "Scale and scope economies among health maintenance organizations," Journal of Health Economics, Elsevier, Elsevier, vol. 15(6), pages 657-684, December.
    4. Helene Bouscasse & François Destandau & Serge Garcia, 2008. "Analyse économétrique des coûts des services d’eau potable et qualité des prestations offertes aux usagers," Working Papers - Cahiers du LEF, Laboratoire d'Economie Forestiere, AgroParisTech-INRA 2008-02, Laboratoire d'Economie Forestiere, AgroParisTech-INRA.

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