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Separating Moral Hazard from Adverse Selection in Automobile Insurance: Longitudinal Evidence from France

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Author Info
Georges Dionne
Pierre-Carl Michaud
Maki Dahchour

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Abstract

This paper uses longitudinal data to perform tests of asymmetric information in the French automobile insurance market for the 1995-1997 period. This market is characterized by the presence of a regulated experience-rating scheme (bonus-malus). We demonstrate that the result of the test depends crucially on how the dynamic process between insurance claims and contract choice is modelled. We apply a Granger causality test controlling for the unobservables. We find evidence of moral hazard which we distinguish from adverse selection using a multivariate dynamic panel data model. Experience rating appears to lead high risk policyholders to choose contracts that involve less coverage over time. These policyholders respond to contract changes by increasing their unobservable efforts to reduce claims.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0420.

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Date of creation: 2004
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Handle: RePEc:lvl:lacicr:0420

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Related research
Keywords: Automobile insurance; road safety; asymmetric information; experience rating; moral hazard; adverse selection; dynamic panel data models; Granger causality test;

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Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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References listed on IDEAS
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  1. Chiappori, Pierre-Andre & Macho, Ines & Rey, Patrick & Salanie, Bernard, 1994. "Repeated moral hazard: The role of memory, commitment, and the access to credit markets," European Economic Review, Elsevier, vol. 38(8), pages 1527-1553, October. [Downloadable!] (restricted)
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  2. Dionne, Georges & Doherty, Neil A, 1994. "Adverse Selection, Commitment, and Renegotiation: Extension to and Evidence from Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 209-35, April. [Downloadable!] (restricted)
    Other versions:
  3. P. Picard, 2000. "Les nouveaux enjeux de la régulation des marchés d'assurance," THEMA Working Papers 2000-53, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
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  6. Crocker, Keith J & Snow, Arthur, 1986. "The Efficiency Effects of Categorical Discrimination in the Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 321-44, April. [Downloadable!] (restricted)
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  8. Dionne, Georges & Gagne, Robert, 2002. " Replacement Cost Endorsement and Opportunistic Fraud in Automobile Insurance," Journal of Risk and Uncertainty, Springer, vol. 24(3), pages 213-30, May. [Downloadable!] (restricted)
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  9. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July. [Downloadable!] (restricted)
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  11. Pierre-André Chiappori ; Bernard Salanié, . "Testing for Asymmetric Information in Insurance Markets," Working Papers 97-11, Centre de Recherche en Economie et Statistique. [Downloadable!]
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  12. Wooldridge, Jeffrey M., 2000. "A framework for estimating dynamic, unobserved effects panel data models with possible feedback to future explanatory variables," Economics Letters, Elsevier, vol. 68(3), pages 245-250, September. [Downloadable!] (restricted)
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  15. 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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  18. repec:rus:hseeco:16303 is not listed on IDEAS
  19. Dionne, Georges & St-Michel, Pierre, 1991. "Workers' Compensation and Moral Hazard," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 236-44, May. [Downloadable!] (restricted)
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  20. Pierre-André Chiappori ; Bruno Jullien ; Bernard Salanié ; François Salanié, 2002. "Asymmetric Information in Insurance : General Testable Implications," Working Papers 2002-42, Centre de Recherche en Economie et Statistique. [Downloadable!]
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  23. Georges Dionne & Christian Gourieroux & Charles Vanasse, 2001. "Testing for Evidence of Adverse Selection in the Automobile Insurance Market: A Comment," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 444-473, April. [Downloadable!] (restricted)
  24. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, 06. [Downloadable!] (restricted)
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  25. Dr. Peter Kenning & Hilke Plassmann, 2004. "NeuroEconomics," Experimental 0412005, EconWPA. [Downloadable!]
  26. Igal Hendel & Alessandro Lizzeri, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, vol. 89(5), pages 1097-1115, December. [Downloadable!] (restricted)
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  27. Crocker, Keith J & Tennyson, Sharon, 2002. "Insurance Fraud and Optimal Claims Settlement Strategies," Journal of Law & Economics, University of Chicago Press, vol. 45(2), pages 469-507, October.
  28. Jaap H. Abbring & James J. Heckman & Pierre-André Chiappori & Jean Pinquet, 2003. "Adverse Selection and Moral Hazard In Insurance: Can Dynamic Data Help to Distinguish?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 512-521, 04/05. [Downloadable!] (restricted)
Full references

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. Lilia Filipova, 2007. "Monitoring and Privacy in Automobile Insurance Markets with Moral Hazard," Discussion Paper Series 293, Universitaet Augsburg, Institute for Economics. [Downloadable!]
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