Adverse Selection, Commitment, and Renegotiation: Extension to and Evidence from Insurance Markets
With asymmetric information, full commitment to long-term contracts may permit markets to approach first-best allocations. However, commitment can be undermined by opportunistic behavior, notably renegotiation. The authors reexamine commitment in insurance markets. They present an alternative model (which extends Jean-Jaques Laffont and Jean Tirole's procurement model to address uncertainty and competition), which involves semipooling in the first period followed by separation. This and competing models (e.g., single-period models and no-commitment models) have different predictions concerning temporal patterns of insurer profitability. A test using California data suggests that some automobile insurers use commitment to attract selective portfolios comprising disproportionate numbers of low risks. Copyright 1994 by University of Chicago Press.
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- Paul Beaudry & Michel Poitevin, 1995.
"Competitive Screening in Financial Markets when Borrowers can Recontract,"
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- Dionne, G. & Lasserre, P., 1983. "Adverse Selection and Repeated Insurance Contracts: Finite and Infinite Horizons," Cahiers de recherche 8326, Universite de Montreal, Departement de sciences economiques.
- Jack Hirschleifer & John G. Riley, 1979. "Uncertainty and Information in Economics," UCLA Economics Working Papers 140, UCLA Department of Economics.
- Kunreuther, Howard & Pauly, Mark, 1985. "Market equilibrium with private knowledge : An insurance example," Journal of Public Economics, Elsevier, vol. 26(3), pages 269-288, April.
- Bolton, Patrick, 1990. "Renegotiation and the dynamics of contract design," European Economic Review, Elsevier, vol. 34(2-3), pages 303-310, May. Full references (including those not matched with items on IDEAS)
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