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When prices hardly matter: Incomplete insurance contracts and markets for repair goods

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  • Nell, Martin
  • Richter, Andreas
  • Schiller, Jörg

Abstract

This paper looks at markets characterized by the fact that the demand side is insured. In these markets a consumer purchases a good to compensate consequen¬ces of unfavorable events, such as an accident or an illness. Insurance policies in most lines of insurance base indemnity on the insured’s actual expenses, i.e., the insured would be partially or completely reimbursed when purchasing certain goods. In this setting we discuss the interaction between insurance and repair markets by focusing, on the one hand, upon the development of prices and the structure of markets with insured consumers, and, on the other hand, the resulting backlash on optimal insurance contracting. We show that even in the absence of ex post moral hazard the extension of insurance coverage will lead to an increase in prices as well as to a socially undesirable increase in the number of repair service suppliers, if repair markets are imperfect.

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Bibliographic Info

Paper provided by University of Munich, Munich School of Management in its series Discussion Papers in Business Administration with number 1187.

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Date of creation: 2006
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Handle: RePEc:lmu:msmdpa:1187

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Keywords: insurance; incomplete contracts; repair markets;

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References

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Cited by:
  1. Boyer, M. Martin & Schiller, Jörg, 2003. "Merging automobile regulatory bodies: The case of Atlantic Canada," Working Papers on Risk and Insurance 11, University of Hamburg, Institute for Risk and Insurance.
  2. Andreas Richter & Jörg Schiller & Harris Schlesinger, 2014. "Behavioral insurance: Theory and experiments," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 85-96, April.
  3. M. Martin Boyer & Jörg Schiller, 2003. "Merging Automobile Insurance Regulatory Bodies: The Case of Atlantic Canada," CIRANO Working Papers 2003s-70, CIRANO.
  4. Urmann, Oliver, 2012. "Insurance in vertically differentiated repair markets," Economics Letters, Elsevier, vol. 116(1), pages 121-123.

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