Competitive Screening in Insurance Markets with Endogenous Labor Supply
AbstractWe examine equilibria in competitive insurance markets when individuals take unobservable labor supply decisions. Precautionary labor motives intro-duce countervailing incentives in the insurance market, and equilibria with positive profits can occur even in the standard case in which individuals exogenously differ in risk only. We then extend the model to allow for both privately known risks and labor productivities. This endogenously introduces two-dimensional heterogeneity in the insurance market since precautionary labor effects lead to differences in income and hence risk aversion. Under these circumstances, separating and pooling equilibria exist, which generally differ from those with exogenous two-dimensional heterogeneity considered by the existing literature. Notably, in contrast to standard screening models, profits may be increasing with insurance coverage, and the correlation between risk and coverage can be zero or negative in equilibrium, a phenomenon frequently observed in empirical studies.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 614.
Length: 34 p.
Date of creation: 2006
Date of revision:
Insurance markets; adverse selection; precautionary labor;
Find related papers by 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
- J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-11 (All new papers)
- NEP-FIN-2006-09-11 (Finance)
- NEP-FMK-2006-09-11 (Financial Markets)
- NEP-IAS-2006-09-11 (Insurance Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Netzer, Nick & Scheuer, Florian, 2007.
"Taxation, insurance, and precautionary labor,"
Journal of Public Economics,
Elsevier, vol. 91(7-8), pages 1519-1531, August.
- De Donder, Philippe & Hindriks, Jean J.G., 2006.
"Does Propitious Selection Explain Why Riskier People Buy Less Insurance?,"
CEPR Discussion Papers
5640, C.E.P.R. Discussion Papers.
- DE DONDER, Philippe & HINDRIKS, Jean, 2006. "Does propitious selection explain why riskier people buy less insurance?," CORE Discussion Papers 2006032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- De Donder, Philippe & Hindriks, Jean, 2006. "Does Propitious Selection Explain why Riskier People buy less Insurance?," IDEI Working Papers 399, Institut d'Économie Industrielle (IDEI), Toulouse.
- Philippe, DE DONDER & Jean, HINDRIKS, 2006. "Does Propitious Selection Explain why Riskier People Buy less Insurance," Discussion Papers (ECON - DÃ©partement des Sciences Economiques) 2006017, Université catholique de Louvain, Département des Sciences Economiques.
- 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, vol. 90(4), pages 630-49, November.
- Jullien, Bruno & Salanié, Bernard & Salanié, François, 2001.
"Screening Risk-Averse Agents Under Moral Hazard,"
IDEI Working Papers
131, Institut d'Économie Industrielle (IDEI), Toulouse.
- Jullien, Bruno & Salanié, Bernard & Salanié, François, 2001. "Screening Risk Averse Agents Under Moral Hazard," CEPR Discussion Papers 3076, C.E.P.R. Discussion Papers.
- Bruno Jullien & Bernard Salanié & François Salanié, 2000. "Screening Risk-Averse Agents Under Moral Hazard," Working Papers 2000-41, Centre de Recherche en Economie et Statistique.
- Pierre-André Chiappori & Bernard Salanié, 1997.
"Testing for Asymmetric Information in Insurance Markets,"
97-11, Centre de Recherche en Economie et Statistique.
- Pierre-Andre Chiappori & Bernard Salanie, 2000. "Testing for Asymmetric Information in Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 56-78, February.
- de Meza, David & Webb, David C, 2001.
"Advantageous Selection in Insurance Markets,"
RAND Journal of Economics,
The RAND Corporation, vol. 32(2), pages 249-62, Summer.
- Eaton, Jonathan & Rosen, Harvey S., 1980. "Labor supply, uncertainty, and efficient taxation," Journal of Public Economics, Elsevier, vol. 14(3), pages 365-374, December.
- Simon C. Parker & Yacine Belghitar & Tim Barmby, 2005.
"Wage Uncertainty and the Labour Supply of Self-Employed Workers,"
Royal Economic Society, vol. 115(502), pages C190-C207, 03.
- Simon Parker & Tim Barmby & Yacine Belghitar, 2004. "Wage Uncertainty And The Labour Supply Of Self-Employed Workers," Royal Economic Society Annual Conference 2004 67, Royal Economic Society.
- Chassagnon, A. & Chiappori, P.A., 1994. "Insurance Under Moral Hazard and Adverse Selection: The Case of Pure Competition," Papers 28, Laval - Laboratoire Econometrie.
- Pierre‐André Chiappori & Bruno Jullien & Bernard Salanié & François Salanié, 2006.
"Asymmetric information in insurance: general testable implications,"
RAND Journal of Economics,
RAND Corporation, vol. 37(4), pages 783-798, December.
- Pierre-André Chiappori & Bruno Jullien & Bernard Salanié & François Salanié, 2002. "Asymmetric Information in Insurance : General Testable Implications," Working Papers 2002-42, Centre de Recherche en Economie et Statistique.
- Hartwick, John M., 2000. "Labor supply under wage uncertainty," Economics Letters, Elsevier, vol. 68(3), pages 319-325, September.
- John Cawley & Tomas Philipson, 1996.
"An Empirical Examination of Information Barriers to Trade in Insurance,"
NBER Working Papers
5669, National Bureau of Economic Research, Inc.
- Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
- John Cawley & Tomas Philipson, 1997. "An Empirical Examination of Information Barriers to Trade inInsurance," University of Chicago - George G. Stigler Center for Study of Economy and State 132, Chicago - Center for Study of Economy and State.
- Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
- Amy Finkelstein & James Poterba, 2004.
"Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market,"
Journal of Political Economy,
University of Chicago Press, vol. 112(1), pages 183-208, February.
- Amy Finkelstein & James Poterba, 2000. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," NBER Working Papers 8045, National Bureau of Economic Research, Inc.
- Hamish Low, 2005. "Self-Insurance in a Life-Cycle Model of Labor Supply and Savings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 945-975, October.
- Miles S. Kimball, 1989.
"Precautionary Saving in the Small and in the Large,"
NBER Working Papers
2848, National Bureau of Economic Research, Inc.
- Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
- Cardon, James H & Hendel, Igal, 2001. "Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 408-27, Autumn.
- Hemenway, David, 1990. "Propitious Selection," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 1063-69, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bibliothek).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.