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Adverse Selection, Commitment, and Renegotiation: Extension to and Evidence from Insurance Markets

Listed author(s):
  • Dionne, Georges
  • Doherty, Neil A

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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File URL: http://dx.doi.org/10.1086/261929
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 102 (1994)
Issue (Month): 2 (April)
Pages: 209-235

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Handle: RePEc:ucp:jpolec:v:102:y:1994:i:2:p:209-35
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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  1. 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.
  2. D'Arcy, Stephen P & Doherty, Neil A, 1990. "Adverse Selection, Private Information, and Lowballing in Insurance Markets," The Journal of Business, University of Chicago Press, vol. 63(2), pages 145-164, April.
  3. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
  4. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-359, March.
  5. 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.
  6. Jack Hirschleifer & John G. Riley, 1979. "Uncertainty and Information in Economics," UCLA Economics Working Papers 140, UCLA Department of Economics.
  7. Beaudry, P. & Poitevin, M., 1990. "Competitive Screening In Financial Market When Borrowers Can Recontract," Cahiers de recherche 9035, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
  8. Bolton, Patrick, 1990. "Renegotiation and the dynamics of contract design," European Economic Review, Elsevier, vol. 34(2-3), pages 303-310, May.
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