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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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File URL: http://www.soi.uzh.ch/research/wp/2009/wp0907.pdf
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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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  1. Fang, Hanming & Keane, Michael & Silverman, Dan, 2006. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Working Papers, Yale University, Department of Economics 17, Yale University, Department of Economics.
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  3. BOADWAY, Robin & LEITE-MONTEIRO, Manuel & MARCHAND, Maurice & PESTIEAU, Pierre, 2004. "Social insurance and redistribution with moral hazard and adverse selection," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2004083, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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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, University of Munich, Department of Economics 20065, University of Munich, Department of Economics.
  2. Michele Sennhauser, 2009. "Why the Linear Utility Function is a Risky Choice in Discrete-Choice Experiments," SOI - Working Papers, Socioeconomic Institute - University of Zurich 1014, Socioeconomic Institute - University of Zurich.
  3. Scheuer, Florian, 2013. "Adverse selection in credit markets and regressive profit taxation," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(4), pages 1333-1360.
  4. 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.
  5. Ilja Neustadt & Peter Zweifel, 2009. "Economic Well-Being, Social Mobility, and Preferences for Income Redistribution: Evidence from a Discrete Choice Experiment," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0909, Socioeconomic Institute - University of Zurich, revised Jan 2010.
  6. Pau Olivella & Fred Schroyen, 2012. "Multidimensional Screening in a Monopolistic Insurance Market," Working Papers 619, Barcelona Graduate School of Economics.
  7. Sandroni, Alvaro & Squintani, Francesco, 2013. "Overconfidence and asymmetric information: The case of insurance," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 93(C), pages 149-165.
  8. Maurus Rischatsch & Maria Trottmann, 2009. "Physician dispensing and the choice between generic and brand-name drugs – Do margins affect choice?," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0911, Socioeconomic Institute - University of Zurich.
  9. Maurus Rischatsch, 2009. "Simulating WTP Values from Random-Coefficient Models," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0912, Socioeconomic Institute - University of Zurich.

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