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Competitive Insurance Markets with Two Unobservables

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  • Smart, Michael

Abstract

I study a screening game in a competitive insurance market in which insurance customers differ with respect to both accident probability and degree of risk aversion. It is shown that indifference curves of customers may cross twice; thus the single crossing property does not hold. When differences in risk aversion are sufficiently large, firms cannot use policy deductibles to screen high-risk customers. Types may be pooled in equilibrium or are separated by raising premiums above actuarially fair levels. This leads to excessive entry of firms in equilibrium. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Smart, Michael, 2000. "Competitive Insurance Markets with Two Unobservables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 153-169, February.
  • Handle: RePEc:ier:iecrev:v:41:y:2000:i:1:p:153-69
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    References listed on IDEAS

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    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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