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On Bundling in Insurance Markets

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This paper analyzes the welfare consequences of bundling different risks in one insurance contract in markets where adverse selection is important. This question is addressed in the context of a competitive insurance model a la Rothschild and Stiglitz (1976) with two sources of risk. Accordingly, there are four possible types of individuals and many incentive compatibility constraints to be considered. We show that the effect of bundling on these incentive compatibility constraints is such that bundling always yields a welfare improvement, and this result only holds when all four types have strictly positive shares in the population. Due to the competition between insurance companies, these benefits accrue to consumers who potentially have fewer contracts to choose from, but benefit from the better sorting possibilities due to bundling.

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File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie0809.pdf
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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0809.

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Date of creation: Jul 2008
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Handle: RePEc:vie:viennp:0809

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Web page: http://www.univie.ac.at/vwl

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  1. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August.
  2. Claude Fluet & François Pannequin, 1996. "Complete vs. Incomplete Insurance Contracts under Adverse Selection with multiple Risks," Cahiers de recherche du Département des sciences économiques, UQAM 9601, Université du Québec à Montréal, Département des sciences économiques.
  3. 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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