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Why is automobile insurance in Philadelphia so damn expensive?

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Author Info
Eric Smith
Randall Wright

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Abstract

We document and attempt to explain the observation that automobile insurance premiums vary dramatically across local markets. We argue high premiums can be attributed to the large numbers of uninsured motorists in some cities, while at the same time, the uninsured motorists can be attributed to high premiums. We construct a simple noncooperative equilibrium model, where limited liability can generate inefficient equilibria with uninsured drivers and high, yet actuarially fair, premiums. For certain parameterizations, an optimal full insurance equilibrium and inefficient high price equilibria with uninsured drivers exist simultaneously, consistent with the observed price variability across seemingly similar cities.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 139.

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Date of creation: 1991
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Handle: RePEc:fip:fedmsr:139

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Keywords: Insurance industry ; Philadelphia (Pa.);

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References listed on IDEAS
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  1. Smith, E. & Wright, R., 1990. "Why Is Automobile Insurance In Philadelphia So Damn Expensive?," Papers e-90-4, Stanford - Hoover Institution.
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Cited by:
(explanations, 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.)

  1. Zenou, Yves, 2007. "Why do Black Workers Search Less? A Transport-Mode Based Theory," CEPR Discussion Papers 6155, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. M. Martin Boyer & Jörg Schiller, 2003. "Merging Automobile Insurance Regulatory Bodies: The Case of Atlantic Canada," CIRANO Working Papers 2003s-70, CIRANO. [Downloadable!]
  3. Eric Smith & Randall Wright, 1991. "Why is automobile insurance in Philadelphia so damn expensive?," Staff Report 139, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  4. Carlsson, Fredrik & Daruvala, Dinky & Johansson-Stenman, Olof, 2001. "Are People Inequality Averse Or Just Risk Averse?," Working Papers in Economics 43, Göteborg University, Department of Economics. [Downloadable!]
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  5. Stefan Josten, 2003. "Inequality, Crime and Economic Growth. A Classical Argument for Distributional Equality," Asia-Pacific Financial Markets, Springer, vol. 10(4), pages 435-452, August. [Downloadable!] (restricted)
  6. Helge Braun & Winfried Koeniger, 2007. "On the role of market insurance in a dynamic model," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 61-90, June. [Downloadable!] (restricted)
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  7. Alma Cohen, 2006. "The Disadvantages of Aggregate Deductibles," The B.E. Journal of Economic Analysis & Policy, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
  8. Khazzoom, J. Daniel, 1999. "Pay-at-the-Pump Auto Insurance," Discussion Papers dp-98-13-rev, Resources For the Future. [Downloadable!]
  9. Scott Freeman, 1991. "Underdevelopment and the enforcement of laws and contracts," Research Paper 9110, Federal Reserve Bank of Dallas. [Downloadable!]
  10. Ming Chang & Chiu Lin & Dachrahn Wu, 2008. "Piracy and limited liability," Journal of Economics, Springer, vol. 95(1), pages 25-53, October. [Downloadable!] (restricted)
  11. Dwight Jaffee & Thomas Russell, 1995. "The Causes and Consequences of Rate Regulation in the Auto Insurance Industry," NBER Working Papers 5245, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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