IDEAS home Printed from https://ideas.repec.org/a/eee/gamebe/v66y2009i2p893-919.html
   My bibliography  Save this article

Costly risk verification without commitment in competitive insurance markets

Author

Listed:
  • Picard, Pierre

Abstract

This paper analyzes the equilibrium of an insurance market where applicants for insurance have a duty of good faith when they reveal private information about their risk type. Insurers can, at some cost, verify the type of insureds who file a claim and they are allowed to retroactively void the insurance contract if it is established that the policyholder has misrepresented his risk when the contract was taken out. However, insurers cannot precommit to their risk verification strategy. The paper analyzes the relationship between second-best Pareto-optimality and the insurance market equilibrium in a game theoretic framework. It characterizes the contracts offered at equilibrium, the individuals' contract choice as well as the conditions under which an equilibrium exists.

Suggested Citation

  • Picard, Pierre, 2009. "Costly risk verification without commitment in competitive insurance markets," Games and Economic Behavior, Elsevier, vol. 66(2), pages 893-919, July.
  • Handle: RePEc:eee:gamebe:v:66:y:2009:i:2:p:893-919
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0899-8256(08)00171-1
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jörg Schiller, 2006. "The Impact of Insurance Fraud Detection Systems," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(3), pages 421-438.
    2. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
    3. A. Dixit & P. Picard, 2002. "On the Role of Good Faith in Insurance Contracting," Princeton Economic Theory Working Papers 26c6897fd1cd46f8f39ffb6ca, David K. Levine.
    4. Crocker, Keith J. & Snow, Arthur, 1985. "The efficiency of competitive equilibria in insurance markets with asymmetric information," Journal of Public Economics, Elsevier, vol. 26(2), pages 207-219, March.
    5. Dionne, G. & St-Michel, P. & Gibbens, A., 1993. "An Economic Analysis of Insurance Fraud," Cahiers de recherche 93010, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    6. Hellwig, Martin, 1987. "Some recent developments in the theory of competition in markets with adverse selection ," European Economic Review, Elsevier, vol. 31(1-2), pages 319-325.
    7. M. Martin Boyer, 2004. "Overcompensation as a Partial Solution to Commitment and Renegotiation Problems: The Case of "Ex Post" Moral Hazard," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 559-582.
    8. 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.
    9. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
    10. A. Dixit, 1999. "Adverse Selection and Insurance with Uberrima Fides," Princeton Economic Theory Papers 99f5, Economics Department, Princeton University.
    11. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October.
    12. Khalil, Fahad & Parigi, Bruno M, 1998. "Loan Size as a Commitment Device," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 135-150, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lando, Henrik, 2016. "Optimal rules of negligent misrepresentation in insurance contract law," International Review of Law and Economics, Elsevier, vol. 46(C), pages 70-77.
    2. Michal Krawczyk, 2009. "The Role of Repetition and Observability in Deterring Insurance Fraud," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 34(1), pages 74-87, June.
    3. Raduna, Daniela Viviana & Roman, Mihai Daniel, 2011. "Risk aversion influence on insurance market," MPRA Paper 37725, University Library of Munich, Germany, revised 01 Feb 2012.
    4. Pierre Picard, 2012. "Economic Analysis of Insurance Fraud," Working Papers hal-00725561, HAL.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:gamebe:v:66:y:2009:i:2:p:893-919. 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: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/622836 .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.