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Adverse Selection, Commitment, and Renegotiation: Extension to and Evidence from Insurance Markets

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Author Info
Dionne, Georges
Doherty, Neil A

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Abstract

With asymmetric information, full commitment to long-term contracts may permit markets to approach first-best allocations. However, commitment can be undermined by opportunistic behavior, notably renegotiation. The authors reexamine commitment in insurance markets. They present an alternative model (which extends Jean-Jaques Laffont and Jean Tirole's procurement model to address uncertainty and competition), which involves semipooling in the first period followed by separation. This and competing models (e.g., single-period models and no-commitment models) have different predictions concerning temporal patterns of insurer profitability. A test using California data suggests that some automobile insurers use commitment to attract selective portfolios comprising disproportionate numbers of low risks. Copyright 1994 by University of Chicago Press.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 102 (1994)
Issue (Month): 2 (April)
Pages: 209-35
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Handle: RePEc:ucp:jpolec:v:102:y:1994:i:2:p:209-35

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  1. Igal Hendel & Alessandro Lizzeri, 2000. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," NBER Working Papers 7470, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Lund, Diderik & Nilssen, Tore, 2003. "Cream Skimming, Dregs Skimming, and Pooling: On the Dynamics of Competitive Screening," Working Papers 01-2003, Copenhagen Business School, Department of Economics. [Downloadable!]
    Other versions:
  3. Alma Cohen & Liran Einav, 2005. "Estimating Risk Preferences from Deductible Choice," NBER Working Papers 11461, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. M. Dahchour & G. Dionne, 2002. "Pricing of Automobile Insurance Under Asymmetric Information : a Study on Panel Data," THEMA Working Papers 2002-12, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
  5. Juha-Pekka Niinimäki, 2003. "Fairly Priced Deposit Insurance under Adverse Selection," Finnish Economic Papers, Finnish Economic Association, vol. 16(1), pages 38-48, Spring. [Downloadable!]
  6. Dionne, G. & Michaud, P.C. & Dahchour, M., 2004. "Separating moral hazard from adverse selection in automobile insurance : longitudinal evidence from France," Discussion Paper 79, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  7. Magnus Lindmark & Lars-Fredrik Andersson & Mike Adams, 2006. "The Evolution and Development of the Swedish Insurance Market," Accounting, Business and Financial History, Taylor and Francis Journals, vol. 16(3), pages 341-370, November. [Downloadable!] (restricted)
  8. Alma Cohen, 2008. "Asymmetric Learning in Repeated Contracting: An Empirical Study," NBER Working Papers 13752, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Marco Battaglini, 2003. "Long-Term Contracting with Markovian Consumers," Theory workshop papers 505798000000000048, UCLA Department of Economics. [Downloadable!]
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  10. Jean Pinquet & Montserrat Guillén & Mercedes Ayuso, 2009. "Commitment and Lapse Behavior in Long-Term Insurance: A Case Study," Working Papers hal-00374303_v1, HAL. [Downloadable!]
  11. Gary Charness & Antonio Cabrales & MARIE-CLAIRE VILLEVAL, 2007. "Competition, Hidden Information, And Efficiency: An Experiment," University of California at Santa Barbara, Economics Working Paper Series 23-07, Department of Economics, UC Santa Barbara. [Downloadable!]
    Other versions:
  12. Somwaru, Agapi & Makki, Shiva S. & Coble, Keith, 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). [Downloadable!]
  13. Gary Charness & Marie Claire Villeval & Antonio Cabrales, 2009. "Hidden Information, Bargaining Power and Efficiency: An Experiment," Working Papers 2009-08, FEDEA. [Downloadable!]
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