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Does Asymmetric Information matter in Competitive Insurance Markets?

Author

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  • Federico Etro

    (Dipartimento di Economia, LUISS University, Rome)

Abstract

Does asymmetric information matter in insurance markets? Recent evidence on the automobile insurance market suggests not, rejecting the separating equilibnum of the Rothschild-Stiglitz model. However, I show that a two-penod version of that model can sustain a pooling equilibrium with experience rating which is consistent with the evidence and it mimics the bonus-malus policies of the automobile insurance markets. I also simulate the model showing that under reasonable conditions coordination failures emerge due to multiple equilibria.

Suggested Citation

  • Federico Etro, 2004. "Does Asymmetric Information matter in Competitive Insurance Markets?," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 112(1), pages 27-46.
    • Handle: RePEc:vep:journl:y:2004:v:112:i:1:p:27-46
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    More about this item

    Keywords

    asymmetric infomation; adverse selection; insurance;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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