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Competitive Screening in Insurance Markets with Endogenous Wealth Heterogeneity

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  • Nick Netzer

    ()
    (Socioeconomic Institute, University of Zurich)

  • Florian Scheuer

    ()
    (Massachusetts Institute of Technology)

Abstract

We examine equilibria in competitive insurance markets with adverse selection when wealth differences arise endogenously from unobservable savings or labor supply decisions. The endogeneity of wealth implies that high risk individuals may ceteris paribus exhibit the lower marginal willingness to pay for insurance than low risks, a phenomenon that we refer to as irregular-crossing preferences. In our model, both risk and patience (or productivity) are privately observable. In contrast to the models in the existing literature, where wealth heterogeneity is exogenously assumed, equilibria in our model no longer exhibit a monotone relation between risk and coverage. Individuals who purchase larger coverage are no longer higher risks, a phenomenon frequently observed in empirical studies.

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Bibliographic Info

Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0907.

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Length: 28 pages
Date of creation: Apr 2009
Date of revision: Jun 2009
Publication status: published in Economic Theory 44, pp. 187-211, 2010
Handle: RePEc:soz:wpaper:0907

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Keywords: Insurance Markets; Adverse Selection; Multidimensional Screening;

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References

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  1. Jullien, Bruno & Salanié, Bernard & Salanié, François, 2001. "Screening Risk Averse Agents Under Moral Hazard," CEPR Discussion Papers 3076, C.E.P.R. Discussion Papers.
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  17. Nick Netzer & Florian Scheuer, 2010. "Competitive Markets without Commitment," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1079 - 1109.
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  24. Nick Netzer & Florian Scheuer, 2005. "Taxation, Insurance and Precautionary Labor," Discussion Papers of DIW Berlin 516, DIW Berlin, German Institute for Economic Research.
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Citations

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Cited by:
  1. Cremer, Helmuth & Roeder, Kerstin, 2013. "Long-term care policy, myopia and redistribution," Munich Reprints in Economics 20065, University of Munich, Department of Economics.
  2. Florian Scheuer, 2012. "Adverse Selection In Credit Markets and Regressive Profit Taxation," NBER Working Papers 18406, National Bureau of Economic Research, Inc.
  3. Maurus Rischatsch, 2009. "Simulating WTP Values from Random-Coefficient Models," SOI - Working Papers 0912, Socioeconomic Institute - University of Zurich.
  4. Maurus Rischatsch & Maria Trottmann, 2009. "Physician dispensing and the choice between generic and brand-name drugs – Do margins affect choice?," SOI - Working Papers 0911, Socioeconomic Institute - University of Zurich.
  5. Olivella, Pau & Schroyen, Fred, 2011. "Multidimensional screening in a monopolistic insurance market," Discussion Paper Series in Economics 19/2011, Department of Economics, Norwegian School of Economics.
  6. Sandroni, Alvaro & Squintani, Francesco, 2013. "Overconfidence and asymmetric information: The case of insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 149-165.
  7. Polk, Andreas & Schmutzler, Armin & Müller, Adrian, 2013. "Lobbying and the Power of Multinational Firms," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79875, Verein für Socialpolitik / German Economic Association.
  8. Michele Sennhauser, 2009. "Why the Linear Utility Function is a Risky Choice in Discrete-Choice Experiments," SOI - Working Papers 1014, Socioeconomic Institute - University of Zurich.
  9. Ilja Neustadt & Peter Zweifel, 2009. "Economic Well-Being, Social Mobility, and Preferences for Income Redistribution: Evidence from a Discrete Choice Experiment," SOI - Working Papers 0909, Socioeconomic Institute - University of Zurich, revised Jan 2010.

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