Competitive Screening in Insurance Markets with Endogenous Labor
AbstractWe 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 InfoPaper 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.
Length: 32 pages
Date of creation: 02 May 2006
Date of revision:
Adverse Selection ; Precautionary Labor ; Insurance Markets;
Find related papers by JEL classification:
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
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- 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.
- Miles S. Kimball, 1989.
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NBER Working Papers
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- Netzer, Nick & Scheuer, Florian, 2007.
"Taxation, insurance, and precautionary labor,"
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Elsevier, vol. 91(7-8), pages 1519-1531, August.
- 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.
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