IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

The Unpleasant Effects of Price Deregulation in the European Third-Party Motor Insurance Market: A Theoretical Framework

  • Scalera Domenico

    ()

    (University of Sannio)

  • Zazzaro Alberto

    ()

    (Università Politecnica delle Marche)

In some European countries, the liberalization of the motor insurance market in the 1990s led to substantial increases in fares and claims throughout the whole decade. In this paper we argue that these phenomena are due to the impact of liberalization on companies' optimal incentives to fight fraud. By developing a circular city competition model with a cost-reducing stage prior to the price game and a settlement stage following it, we show that price deregulation entails decreasing monitoring investments and increasing claims both in the short and long run. Even equilibrium premiums may steadily increase if the ``competition effect" connected to new entries is outweighed by a ``monitoring effect" that raises marginal costs.

If you experience problems downloading a file, check if you have the proper application to view it first. 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.

File URL: http://www.degruyter.com/view/j/bejeap.2007.7.1/bejeap.2007.7.1.1764/bejeap.2007.7.1.1764.xml?format=INT
Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 7 (2007)
Issue (Month): 1 (October)
Pages: 1-30

as
in new window

Handle: RePEc:bpj:bejeap:v:7:y:2007:i:1:n:50
Contact details of provider: Web page: http://www.degruyter.com

Order Information: Web: http://www.degruyter.com/view/j/bejeap

References listed on IDEAS
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.:

as in new window
  1. Schiller, Jörg, 2002. "The impact of insurance fraud detection systems," Working Papers on Risk and Insurance 8, University of Hamburg, Institute for Risk and Insurance.
  2. L. Caron & G. Dionne, 1997. "Insurance fraud estimation : more evidence from the Quebec automobile insurance industry," THEMA Working Papers 97-21, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  3. Donatella Porrini, 2004. "Information Exchange as Collusive Behaviour: Evidence from an Antitrust Intervention in the Italian Insurance Market," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 29(2), pages 219-233, April.
  4. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  5. Vives, Xavier, 2005. "Innovation and Competitive Pressure," Department of Economics, Working Paper Series qt1s1059vr, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. Buzzacchi, Luigi & Valletti, Tommaso M., 2006. "Firm size distribution: Testing the "independent submarkets model" in the Italian motor insurance industry," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 809-834, July.
  7. Nahum D. Melumad & Dilip Mookherjee, 1989. "Delegation as Commitment: The Case of Income Tax Audits," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 139-163, Summer.
  8. Bond, E.W. & Crocker, K.J., 1993. "Hardball and the Soft Touch: The Economics of Optimal Insurance Contracts with Costly State Verification and Endogenous Monitoring Costs," Papers 10-93-1b, Pennsylvania State - Department of Economics.
  9. Norman, George & Thisse, Jacques-Francois, 1996. "Product Variety and Welfare under Tough and Soft Pricing Regimes," Economic Journal, Royal Economic Society, vol. 106(434), pages 76-91, January.
  10. Novshek, William, 1980. "Equilibrium in simple spatial (or differentiated product) models," Journal of Economic Theory, Elsevier, vol. 22(2), pages 313-326, April.
  11. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
  12. David S. Loughran, 2005. "Deterring Fraud: The Role of General Damage Awards in Automobile Insurance Settlements," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(4), pages 551-575.
  13. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  14. Helen Doerpinghaus & Joan Schmit & Jason Jia-Hsing Yeh, 2003. "Personal Bias in Automobile Claims Settlement," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(2), pages 185-205.
  15. Domenico Scalera & Alberto Zazzaro, 2005. "Cost reducing investments and spatial competition," Economics Bulletin, AccessEcon, vol. 12(20), pages 1-8.
  16. I.P.L. P'ng, 1983. "Strategic Behavior in Suit, Settlement, and Trial," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 539-550, Autumn.
  17. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
  18. Donatella Porrini, 2002. "Frodi nell'assicurazione RC Auto: analisi economica e possibili rimedi," Rivista di Politica Economica, SIPI Spa, vol. 92(2), pages 109-138, March-Apr.
  19. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April.
  20. Crocker, Keith J & Tennyson, Sharon, 2002. "Insurance Fraud and Optimal Claims Settlement Strategies," Journal of Law and Economics, University of Chicago Press, vol. 45(2), pages 469-507, October.
  21. Economides, Nicholas, 1989. "Symmetric equilibrium existence and optimality in differentiated product markets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 178-194, February.
  22. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
  23. Picard, Pierre, 1996. "Auditing claims in the insurance market with fraud: The credibility issue," Journal of Public Economics, Elsevier, vol. 63(1), pages 27-56, December.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:bpj:bejeap:v:7:y:2007:i:1:n:50. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.