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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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    File URL: http://links.jstor.org/sici?sici=0741-6261%28198624%2917%3A4%3C606%3ACFEAQB%3E2.0.CO%3B2-4&origin=repec
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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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    Web page: http://www.rje.org

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    Web: http://gemini.econ.umd.edu/cgi-bin/rje_online.cgi

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    Cited by:
    1. Jenni Pääkkönen & Timo Seppälä, 2012. "Dimensions of health care system quality in Finland," Working Papers 31, Government Institute for Economic Research Finland (VATT).
    2. Allen N. Berger & J. David Cummins & Mary A. Weiss, 1995. "The Coexistence of Multiple Distributions Systems for Financial Services: The Case of Property-Liability Insurance," Center for Financial Institutions Working Papers 95-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
    3. Paul J. Gertler & Donald M. Waldman, 1990. "Quality Adjusted Cost Functions," NBER Working Papers 3567, National Bureau of Economic Research, Inc.
    4. Robert Gagné & Georges Dionne, 1996. "Progrès technique et croissance de la productivité : estimations sur un panel incomplet de firmes ayant des qualités de production différentes," Économie et Prévision, Programme National Persée, vol. 126(5), pages 63-76.
    5. Ollinger, Michael & Ralston, Katherine L. & Guthrie, Joanne F., 2012. "Location, School Characteristics, and the Cost of School Meals," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(3), December.
    6. Kathleen Carey & Theodore Stefos, 2011. "Controlling for quality in the hospital cost function," Health Care Management Science, Springer, vol. 14(2), pages 125-134, June.
    7. 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 2008-02, Laboratoire d'Economie Forestiere, AgroParisTech-INRA.
    8. Wholey, Douglas & Feldman, Roger & Christianson, Jon B. & Engberg, John, 1996. "Scale and scope economies among health maintenance organizations," Journal of Health Economics, Elsevier, vol. 15(6), pages 657-684, December.

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