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Competitive Screening in Insurance Markets with Endogenous Labor

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  • Nick Netzer

    ()
    (Department of Economics, University of Konstanz)

  • Florian Scheuer

    ()
    (Department of Economics, Massachussetts Institute of Technology)

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    Abstract

    We examine equilibria in the sense of Rothschild and Stiglitz (1976) in competitive insurance markets when individuals take unobservable labor supply decisions. Precautionary labor motives introduce countervailing incentives in the insurance market, and imperfect type separation can occur in the standard case in which individuals differ only in risk. We then extend the model to allow for both unobservable risks and labor productivities. Under these circumstances, both imperfect risk separation and genuine pooling of different risk-productivity types can arise. We show that such equilibria, with endogenous income heterogeneity, generally differ from those under exogenous income heterogeneity analyzed by Smart (2000) and Wambach (2000). We provide necessary and sufficient equilibrium existence conditions.

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    Bibliographic Info

    Paper provided by Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim in its series Working Papers of the Research Group Heterogenous Labor with number 06-11.

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    Length: 32 pages
    Date of creation: 02 May 2006
    Date of revision:
    Handle: RePEc:knz:hetero:0611

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    Keywords: Adverse Selection ; Precautionary Labor ; Insurance Markets;

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    References

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    1. 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.
    2. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    3. Nick Netzer & Florian Scheuer, 2005. "Taxation, Insurance and Precautionary Labor," Discussion Papers of DIW Berlin 516, DIW Berlin, German Institute for Economic Research.
    4. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
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