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Competitive screening in insurance markets with endogenous wealth heterogeneity

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  • Nick Netzer

    ()

  • Florian Scheuer

    ()

Abstract

We examine equilibria in competitive insurance markets with adverse selection when wealth differences arise endogenously from unobservable savings or labor supply decisions. The endogeneity of wealth implies that high risk individuals may ceteris paribus exhibit the lower marginal willingness to pay for insurance than low risks, a phenomenon that we refer to as irregular-crossing preferences. In our model, both risk and patience (or productivity) are privately observable. In contrast to the models in the existing literature, where wealth heterogeneity is exogenously assumed, equilibria in our model no longer exhibit a monotone relation between risk and coverage. Individuals who purchase larger coverage are no longer higher risks, a phenomenon frequently observed in empirical studies.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 44 (2010)
Issue (Month): 2 (August)
Pages: 187-211

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Handle: RePEc:spr:joecth:v:44:y:2010:i:2:p:187-211

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Related research

Keywords: Insurance markets; Adverse selection; Multidimensional screening; D82; G22; J22;

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References

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  1. John Cawley & Tomas Philipson, 1996. "An Empirical Examination of Information Barriers to Trade in Insurance," NBER Working Papers 5669, National Bureau of Economic Research, Inc.
  2. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
  3. Fang, Hanming & Keane, Michael & Silverman, Dan, 2006. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Working Papers 17, Yale University, Department of Economics.
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  12. Jeffrey R. Brown, 1999. "Private Pensions, Mortality Risk, and the Decision to Annuitize," NBER Working Papers 7191, National Bureau of Economic Research, Inc.
  13. Hemenway, David, 1990. "Propitious Selection," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 1063-69, November.
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  17. De Meza, D. & Webb, D.C., 2000. "Advantageous Selection in Insurance Market," Discussion Papers 0007, Exeter University, Department of Economics.
  18. Boadway, Robin & Leite-Monteiro, Manuel & Marchand, Maurice G. & Pestieau, Pierre, 2004. "Social Insurance and Redistribution with Moral Hazard and Adverse Selection," CEPR Discussion Papers 4253, C.E.P.R. Discussion Papers.
  19. Nick Netzer & Florian Scheuer, 2005. "Taxation, Insurance and Precautionary Labor," Discussion Papers of DIW Berlin 516, DIW Berlin, German Institute for Economic Research.
  20. 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.
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Citations

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Cited by:
  1. Michele Sennhauser, 2009. "Why the Linear Utility Function is a Risky Choice in Discrete-Choice Experiments," SOI - Working Papers 1014, Socioeconomic Institute - University of Zurich.
  2. Helmuth Cremer & Kerstin Roeder, 2012. "Long-Term Care Policy, Myopia and Redistribution," CESifo Working Paper Series 3843, CESifo Group Munich.
  3. Maurus Rischatsch, 2009. "Simulating WTP Values from Random-Coefficient Models," SOI - Working Papers 0912, Socioeconomic Institute - University of Zurich.
  4. OLIVELLA, Pau & SCHROYEN, Fred, 2011. "Multidimensional screening in a monopolistic insurance market," CORE Discussion Papers 2011056, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Sandroni, Alvaro & Squintani, Francesco, 2013. "Overconfidence and asymmetric information: The case of insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 149-165.
  6. Florian Scheuer, 2012. "Adverse Selection In Credit Markets and Regressive Profit Taxation," NBER Working Papers 18406, National Bureau of Economic Research, Inc.
  7. Maurus Rischatsch & Maria Trottmann, 2009. "Physician dispensing and the choice between generic and brand-name drugs – Do margins affect choice?," SOI - Working Papers 0911, Socioeconomic Institute - University of Zurich.
  8. Polk, Andreas & Schmutzler, Armin & Müller, Adrian, 2013. "Lobbying and the Power of Multinational Firms," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79875, Verein für Socialpolitik / German Economic Association.
  9. Ilja Neustadt & Peter Zweifel, 2009. "Economic Well-Being, Social Mobility, and Preferences for Income Redistribution: Evidence from a Discrete Choice Experiment," SOI - Working Papers 0909, Socioeconomic Institute - University of Zurich, revised Jan 2010.

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