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Pooling and Separating Equilibria in Insurance Markets with Adverse Selection and Distribution Costs*

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  • Marie Allard

    () (Ecole des Hautes Etudes Commerciales (HEC), 3000, chemin de la Côte-Sainte-Catherine, Montreal, Quebec, Canada H3T 2A7.)

  • Jean-Paul Cresta

    (IDEI, GREMAQ, LEA (University of Toulouse le Mirail))

  • Jean-Charles Rochet

    () (IDEI, GREMAQ, University of Toulouse I.)

Abstract

In the Rothschild-Stiglitz [1976] model of a competitive insurance market with adverse selection, pooling equilibria cannot exist. However in practice, pooling contracts are frequent, notably in health insurance and life insurance. This is due to the fact that distribution costs are nonnegligible and increase rapidly when more contracts are offered. We modify accordingly the Rothschild-Stiglitz model by introducing such distribution costs. We find that, however small these costs may be, they entail possible existence of pooling equilibria. Moreover, in these pooling equilibria, it is the high-risk individuals who are rationed, in the sense that they would be willing to buy more insurance at the current premium/insurance ratio. The Geneva Papers on Risk and Insurance Theory (1997) 22, 103–120. doi:10.1023/A:1008664000457

Suggested Citation

  • Marie Allard & Jean-Paul Cresta & Jean-Charles Rochet, 1997. "Pooling and Separating Equilibria in Insurance Markets with Adverse Selection and Distribution Costs*," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 22(2), pages 103-120, December.
  • Handle: RePEc:pal:genrir:v:22:y:1997:i:2:p:103-120
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    Cited by:

    1. Ramsay, Colin M. & Oguledo, Victor I. & Pathak, Priya, 2013. "Pricing high-risk and low-risk insurance contracts with incomplete information and production costs," Insurance: Mathematics and Economics, Elsevier, vol. 52(3), pages 606-614.
    2. Alfons J. Weichenrieder, 1999. "How Efficient is a Contestable Natural Monopoly?," CESifo Working Paper Series 186, CESifo Group Munich.
    3. Igor Livshits & James C. Mac Gee & Michèle Tertilt, 2016. "The Democratization of Credit and the Rise in Consumer Bankruptcies," Review of Economic Studies, Oxford University Press, vol. 83(4), pages 1673-1710.

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