Giuseppe De Feo () (Department of Economics, University of Strathclyde) Jean Hindriks () (Department of Economics and CORE, Universite catholique de Louvain, Belgium)
Additional information is available for the following
registered author(s):
There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad and that adverse selection is in general worse under competition than under monopoly. The reason is that monopoly can exploit its market power to relax incentive constraints by cross-subsidization between different risk types. Cream-skimming behavior, on the contrary, prevents competitive firms from using implicit transfers. In effect monopoly is shown to provide better coverage to those buying insurance but at the cost of limiting participation to insurance. Performing simulation for different distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. However, most of the surplus is retained by the firm and, as a result, most individuals prefer competitive markets notwithstanding their performance is generally poorer than monopoly.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number
09-21.
Did you know? You can include your works in the database easily by uploading them on the Munich Personal RePEc Archive (MPRA) if you do not have access to an institutional RePEc archive.