Repeated Insurance Contracts with Adverse Selection and Limited Commitment
In this paper, the authors describe the sequential equilibria of a two-period monopoly with asymmetric information and limited commitment in the market for accident insurance. The role of learning is analyzed, and the possible sequential pooling, semiseparating, and separating equilibria are described (where the probability that a buyer will make a revealing first-period contract choice is equal to zero, is positive, and is equal to one, respectively). In the absence of discounting, the authors show that only pooling and semiseparating equilibria exist; provide a limited characterization of when these equilibria occur; and show that accident-contingent insurance and accident underreporting occur with positive probability along the equilibrium path of the game. Copyright 1989, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Volume (Year): 104 (1989)
Issue (Month): 2 (May)
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