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Adverse Selection, Private Information, and Lowballing in Insurance Markets

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  • D'Arcy, Stephen P
  • Doherty, Neil A
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    Abstract

    Recent contributions to the adverse selection literature have focused on a multiperiod competitive environment. In this setting a clean distinction arises between the predictions of competing models. Cooper and Hayes extend the model of Rothschild and Stiglitz to multiple periods. The result is a self-selecting equilibrium characterized by price highballing, or systematically overcharging new business. Kunreuther and Pauly suggest that information asymmetries between competing insurance firms render such price-quantity policies infeasible. Their model results in a pooling equilibrium that is characterized by price lowballing, or systematically undercharging new business. Our evidence is consistent with the Kunreuther and Pauly model and reveals the persistence of adverse selection in the automobile insurance market. Copyright 1990 by the University of Chicago.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 63 (1990)
    Issue (Month): 2 (April)
    Pages: 145-64

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    Handle: RePEc:ucp:jnlbus:v:63:y:1990:i:2:p:145-64

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Somwaru, Agapi & Makki, Shiva S. & Coble, Keith H., 1998. "Adverse Selection In The Market For Crop Insurance," 1998 Annual meeting, August 2-5, Salt Lake City, UT 21002, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Sharon Tennyson, 2011. "Consumers’ Insurance Literacy," NFI Policy Briefs 2011-PB-06, Indiana State University, Scott College of Business, Networks Financial Institute.
    3. Alma Cohen & Liran Einav, 2005. "Estimating Risk Preferences from Deductible Choice," Discussion Papers 04-031, Stanford Institute for Economic Policy Research.
    4. Venezia, Itzhak & Galai, Dan & Shapira, Zur, 1999. "Exclusive vs. independent agents: a separating equilibrium approach," Journal of Economic Behavior & Organization, Elsevier, vol. 40(4), pages 443-456, December.
    5. Dionne, Georges & Michaud, Pierre-Carl & Pinquet, Jean, 2013. "A review of recent theoretical and empirical analyses of asymmetric information in road safety and automobile insurance," Research in Transportation Economics, Elsevier, vol. 43(1), pages 85-97.
    6. Cummins, J. David & Danzon, Patricia M., 1997. "Price, Financial Quality, and Capital Flows in Insurance Markets," Journal of Financial Intermediation, Elsevier, vol. 6(1), pages 3-38, January.
    7. Dwight Jaffee & Thomas Russell, 1995. "The Causes and Consequences of Rate Regulation in the Auto Insurance Industry," NBER Working Papers 5245, National Bureau of Economic Research, Inc.
    8. Georges Dionne, 2012. "The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data," Cahiers de recherche 1233, CIRPEE.
    9. Nilssen, Tore, 2000. "Consumer lock-in with asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 641-666, May.
    10. Alma Cohen, 2012. "Asymmetric Learning in Repeated Contracting: An Empirical Study," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 419-432, May.
    11. SchlĂĽtter, Sebastian, 2011. "Capital requirements or pricing constraints? An economic analysis of measures for insurance regulation," ICIR Working Paper Series 03/11, International Center for Insurance Regulation (ICIR), Goethe University Frankfurt.
    12. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84.

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