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The Welfare Effects of Discrimination in Insurance

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  • Rob van der Noll

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    (CPB Netherlands Bureau for Economic Policy, and Erasmus Universiteit Rotterdam)

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    Abstract

    We study an insurance model characterized by a continuum of risk types, private information and a competitive supply side. We use the model to investigate the welfare effects of discrimination (also known as risk selection). We postulate that a test is available that determines whether an applicant's risk exceeds a treshold. Excluding the highest risks softens adverse selection, but constitutes a welfare loss for the high risks. In contrast to a lemons market intuition, we find that aggregate surplus decreases when risk aversion is high. When risk aversion is low however, discrimination increases aggregate surplus.

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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 06-012/1.

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    Date of creation: 20 Jan 2006
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    Handle: RePEc:dgr:uvatin:20060012

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    Web page: http://www.tinbergen.nl

    Related research

    Keywords: insurance; adverse selection; risk selection; discrimination;

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    1. Michael Hoy & Peter Lambert, 2000. "Genetic Screening and Price Discrimination in Insurance Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 25(2), pages 103-130, December.
    2. A. Dixit & P. Picard, 2002. "On the Role of Good Faith in Insurance Contracting," Princeton Economic Theory Working Papers, David K. Levine 26c6897fd1cd46f8f39ffb6ca, David K. Levine.
    3. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 630-49, November.
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