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Advantageous Selection in Insurance Market

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Author Info
De Meza, D.
Webb, D.C.

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Abstract

This paper reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision. Risk-tolerant individuals take few precautions and are disinclined to insure, but are drawn into a pooling equilibrium by the low premiums created by the presence of safer, more risk-averse types. Taxing insurance drives out the reckless clients, allowing a strict Pareto gain. This result depends on administrative costs in processing claims and issuing policies, as does the novel finding of a pure-strategy, partial-pooling, sub-game-perfect, Nash equilibrium in the insurance market.

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Publisher Info
Paper provided by University of Exeter, School of Business and Economics in its series Discussion Papers with number 00/07.

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Length: 27 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:fth:exetec:00/07

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Postal: School of Business and Economics University of Exeter Streatham Court Rennes Drive Exeter EX4 4PU
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Fax: (01392) 263242
Web page: http://www.exeter.ac.uk/sobe/
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Related research
Keywords: INFORMATION ; COMPETITION ; INSURANCE ; RISK;

Other versions of this item:

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance

Cited by:
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  1. Patrick Bajari & Han Hong & Ahmed Khwaja, 2006. "Moral Hazard, Adverse Selection and Health Expenditures: A Semiparametric Analysis," NBER Working Papers 12445, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Bolhaar, Jonneke & Lindeboom, Maarten & van der Klaauw, Bas, 2008. "A Dynamic Analysis of the Demand for Health Insurance and Health Care," IZA Discussion Papers 3698, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Joseph J. Doyle Jr., 2005. "Health Insurance, Treatment and Outcomes: Using Auto Accidents as Health Shocks," NBER Working Papers 11099, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. 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). [Downloadable!]
    Other versions:
  5. Jean Pinquet & Guillén Montserrat, 2008. "Long-Term Care: Risk Description of a Spanish Portfolio and Economic Analysis of the Timing of Insurance Purchase," Post-Print hal-00343104_v1, HAL. [Downloadable!]
  6. Hanming Fang & Michael P. Keane & Dan Silverman, 2006. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," NBER Working Papers 12289, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Assar Lindbeck & Mats Persson, 2006. "A Model of Income Insurance and Social Norms," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  8. Stanciole, Anderson, 2007. "Health Insurance and Life Style Choices: Identifying the Ex Ante Moral Hazard," IRISS Working Paper Series 2007-10, IRISS at CEPS/INSTEAD. [Downloadable!]
  9. Mette Ejrnaes & Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance," Tinbergen Institute Discussion Papers 08-065/3, Tinbergen Institute. [Downloadable!]
  10. Mette Ejrnæs & Gabriel Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance: Empirical Evidence from a Large Administrative Sample," CAM Working Papers 2008-02, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
  11. Alma Cohen & Liran Einav, 2005. "Estimating Risk Preferences from Deductible Choice," NBER Working Papers 11461, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Ari Hyytinen & Ilkka Kuosa & Tuomas Takalo, 2001. "Law or Finance: Evidence from Finland (Revised version 25.09.2002))," Discussion Papers 775, The Research Institute of the Finnish Economy. [Downloadable!]
  13. Steven D. Levitt & Joseph J. Doyle, 2006. "Evaluating the Effectiveness of Child Safety Seats and Seat Belts in Protecting Children from Injury," NBER Working Papers 12519, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Karlan, Dean S. & Zinman, Jonathan, 2007. "Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment," CEPR Discussion Papers 6182, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Liran Einav & Amy Finkelstein & Mark R. Cullen, 2008. "Estimating Welfare in Insurance Markets Using Variation in Prices," NBER Working Papers 14414, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. JULLIEN, Bruno & SALANIÉ, Bernard & SALANIÉ, François, 2001. "Screening Risk-Averse Agents Under Moral Hazard," IDEI Working Papers 131, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  17. Dardanoni, V & Li Donni, P, 2008. "Testing For Asymmetric Information In Insurance Markets With Unobservable Types," Health, Econometrics and Data Group (HEDG) Working Papers 08/26, HEDG, c/o Department of Economics, University of York. [Downloadable!]
  18. Amy Finkelstein & Kathleen McGarry, 2003. "Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance," NBER Working Papers 9957, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. Nick Netzer & Florian Scheuer, 2006. "Competitive Screening in Insurance Markets with Endogenous Labor Supply," Discussion Papers of DIW Berlin 614, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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