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Price Adjustment in an Automobile Insurance Market: A Test of the Sheshinski-Weiss Model

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  • Bev Dahlby

Abstract

Nominal price rigidity is explained in the Sheshinski-Weiss (SW) model by costly price adjustment. The predictions of the SW model, which describe a firm's optimal forward-looking price adjustment strategy, were derived and tested using microdata on the timing and the magnitude of premium changes by sixty-nine firms in the Alberta automobile insurance market over the period 1974-82. The model was tested by estimating the structural equations of the model, probit equations for premium changes, and reduced-form equations for the firm's new premium and its old premium. The overall conclusion is that the SW model does not explain the price adjustments observed in the Alberta automobile insurance market.

Suggested Citation

  • Bev Dahlby, 1992. "Price Adjustment in an Automobile Insurance Market: A Test of the Sheshinski-Weiss Model," Canadian Journal of Economics, Canadian Economics Association, vol. 25(3), pages 564-583, August.
    • Handle: RePEc:cje:issued:v:25:y:1992:i:3:p:564-83
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    Cited by:

    1. Gautier, Erwan & Le Bihan, Hervé, 2011. "Time-varying (S, s) band models: Properties and interpretation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 394-412, March.
    2. Gautier, E. & Le Bihan, H., 2009. "Time-varying (S, s) band models: empirical properties and interpretation," Working papers 231, Banque de France.
    3. Emmanuel Dhyne & Jerzy Konieczny & Fabio Rumler & Patrick Sevestre, 2009. "Price rigidity in the euro area - An assessment," European Economy - Economic Papers 2008 - 2015 380, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Davis, Michael C & Hamilton, James D, 2004. "Why Are Prices Sticky? The Dynamics of Wholesale Gasoline Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 17-37, February.
    5. Slade, Margaret E., 1999. "Sticky prices in a dynamic oligopoly: An investigation of (s,S) thresholds," International Journal of Industrial Organization, Elsevier, vol. 17(4), pages 477-511, May.
    6. Simon Hall & Mark Walsh & Anthony Yates, 1997. "How do UK companies set prices?," Bank of England working papers 67, Bank of England.
    7. Erwan Gautier, 2009. "Les ajustements microéconomiques des prix : une synthèse des modèles théoriques et résultats empiriques," Revue d'économie politique, Dalloz, vol. 119(3), pages 323-372.
    8. Marcus Asplund & Rickard Eriksson & Richard Friberg, 2000. "Price Adjustments by a Gasoline Retail Chain," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(1), pages 101-121, March.
    9. Kim Scharf, 1999. "Tax incentives for extraction and recycling of basic materials in Canada," Fiscal Studies, Institute for Fiscal Studies, vol. 20(4), pages 451-477, December.
    10. Brian O'Reilly, 1998. "The Benefits of Low Inflation: Taking Shock "A nickel ain't worth a dime any more" [Yogi Berra]," Technical Reports 83, Bank of Canada.
    11. Larry A. Cox & Yanling Ge, 2004. "Temporal Profitability and Pricing of Long‐Term Care Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 677-705, December.
    12. Brown, David P. & Eckert, Andrew, 2018. "The effect of default rates on retail competition and pricing decisions of competitive retailers: The case of Alberta," Energy Policy, Elsevier, vol. 118(C), pages 298-311.
    13. J. Konieczny, A. Skrzpacz, 2006. "Search, Costly Price Adjustment and the Frequency of Price Changes - Theory and Evidence," Working Papers eg0054, Wilfrid Laurier University, Department of Economics, revised 2006.

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