Costly risk verification without commitment in competitive insurance markets
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.
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- Jörg Schiller, 2006.
"The Impact of Insurance Fraud Detection Systems,"
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- Joerg Schiller, 2003. "The Impact of Insurance Fraud Detection Systems," Microeconomics 0309003, EconWPA, revised 02 Oct 2003.
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- 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.
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- Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
- A. Dixit, 1999. "Adverse Selection and Insurance with Uberrima Fides," Princeton Economic Theory Papers 99f5, Economics Department, Princeton University.
- Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October.
- Eric Maskin & Jean Tirole, 1997. "Markov Perfect Equilibrium, I: Observable Actions," Harvard Institute of Economic Research Working Papers 1799, Harvard - Institute of Economic Research.
- 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)
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