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Competitive Insurance Markets and Adverse Selection in the Lab

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  • Dorra Riahi
  • Louis Lévy-Garboua

    ()

  • Claude Montmarquette

    ()

Abstract

We provide an experimental analysis of competitive insurance markets with adverse selection. Our parameterized version of the lemons’ model (Akerlof 1970) in the insurance context predicts total crowding out of low-risks when insurers offer a single full insurance contract. The therapy proposed by Rothschild and Stiglitz (1976) to solve this major inefficiency consists of adding a partial insurance contract so as to obtain a self-selection of risks. We test the theoretical predictions of these two well-known models in two experiments. A clean test is obtained by matching the parameters of the two experiments and by controlling for the risk neutrality of insurers and the common risk aversion of their clients by means of the binary lottery procedure. The results reveal a partial crowding out of low risks in the first experiment. Crowding out is not eliminated in the second experiment and it is not even significantly reduced. Finally, instead of the predicted separating equilibrium, we find pooling equilibria. We interpret these results by observing that, in any period, some high risks do not purchase full insurance at lower than fair price and some low risks purchase insurance at a price higher than their induced willingness to pay. These robust findings are inconsistent with expected utility maximization. The observed distortion of probabilities leads to a partial homogenization of perceived risks. Ce travail offre une analyse expérimentale des marchés d’assurance avec anti-sélection. Nous nous intéressons particulièrement aux modèles canoniques d’Akerlof [1970] et de Rothschild et Stiglitz [1976]. Selon Alerlof (1970) l’anti-sélection peut aboutir à une éviction complète des agents les moins risqués. Selon Rothschild et Stiglitz (1976), les contrats de franchise permettent de dépasser cette limite en organisant la sélection des risques : à l’équilibre de marché, les contrats sont spécialisés en fonction des risques individuels. La présente contribution vise à tester ces prédictions théoriques à travers deux expériences de marché d’assurance. Afin de respecter au mieux les hypothèses de base des modèles d’Akerlof et de Rothschild et Stiglitz, nous recourons, dans l’expérimentation, à la technique des loteries binaires. Cette technique génère une neutralité au risque pour les assureurs et une même aversion au risque pour les assurés. Ces expériences sont, à notre connaissance, les premières visant à tester les prédictions des modèles d’assurance avec anti-sélection avec un contrôle des préférences des participants. Les résultats démontrent une éviction partielle des bas risques dans le contexte d’Akerlof (expérience 1). Une éviction qui ne disparaît pas après l’introduction des contrats de franchise (expérience 2). Enfin, à l’opposé de l’équilibre séparateur préconisé par Rothschild et Stiglitz, c’est l’équilibre de pooling qui apparaît (expérience 2). Nous interprétons ces résultats en observant que, dans certaines périodes, certains hauts risques n’achètent pas une assurance complète à un prix inférieur au prix équitable et que certains bas risques achètent une assurance à un prix supérieur à leur volonté induite à payer. Ces résultats robustes sont incompatibles avec la maximisation de l'utilité attendue. La distorsion observée des probabilités conduit à une homogénéisation partielle des risques perçus.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2010s-34.

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Date of creation: 01 Aug 2010
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Handle: RePEc:cir:cirwor:2010s-34

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Keywords: experimental economics; insurance markets; adverse selection; binary lottery procedure; expected utility ; économie expérimentale; marché d’assurance; anti-sélection; loterie binaire;

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Cited by:
  1. Dengov, V. & Melnikova, E., 2013. "Adverse selection in various insurance markets and the ways to deal with it (the experience of practical research)," Annals of marketing-mba, Department of Marketing, Marketing MBA (RSconsult), vol. 2, 07.

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