IDEAS home Printed from https://ideas.repec.org/a/ucp/jpolec/v99y1991i1p177-200.html
   My bibliography  Save this article

Smoking, Skydiving, and Knitting: The Endogenous Categorization of Risks in Insurance Markets with Asymmetric Information

Author

Listed:
  • Bond, Eric W
  • Crocker, Keith J

Abstract

The authors analyze the efficiency and market equilibrium of endogenous categorization, where insurance companies classify risks on the basis of insureds' voluntary consumption of products that are correlated with underlying loss propensities, and they show that the use of such categorization may permit the attainment of first-best allocations as competitive Nash equilibria. The optimal insurance premium involves a trade-off between the use of categorization to correct moral hazard externalities generated by the consumption of the product and the use of differential consumption to sort heterogenous consumers, thereby mitigating the social costs of adverse selection. Copyright 1991 by University of Chicago Press.

Suggested Citation

  • Bond, Eric W & Crocker, Keith J, 1991. "Smoking, Skydiving, and Knitting: The Endogenous Categorization of Risks in Insurance Markets with Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 177-200, February.
  • Handle: RePEc:ucp:jpolec:v:99:y:1991:i:1:p:177-200
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/261745
    File Function: full text
    Download Restriction: Access to full text is restricted to subscribers. See http://www.journals.uchicago.edu/JPE for details.

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Doherty, Neil A. & Kartasheva, Anastasia V. & Phillips, Richard D., 2012. "Information effect of entry into credit ratings market: The case of insurers' ratings," Journal of Financial Economics, Elsevier, vol. 106(2), pages 308-330.
    2. Renaud Bourlès, 2017. "Prevention incentives in long-term insurance contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(3), pages 661-674, September.
    3. Dionne, G. & Doherty, N., 1991. "Adverse Selection In Insurance Markets: A Selective Survey," Cahiers de recherche 9105, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    4. Luigi Buzzacchi & Tommaso Valletti, 2005. "Strategic Price Discrimination in Compulsory Insurance Markets," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 30(1), pages 71-97, June.
    5. Gautam Goswami & Martin Grace & Michael Rebello, 2008. "Experimental evidence on coverage choices and contract prices in the market for corporate insurance," Experimental Economics, Springer;Economic Science Association, vol. 11(1), pages 67-95, March.
    6. Hyojoung Kim & Doyoung Kim & Subin Im & James W. Hardin, 2009. "Evidence of Asymmetric Information in the Automobile Insurance Market: Dichotomous Versus Multinomial Measurement of Insurance Coverage," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 343-366.
    7. Sharon Tennyson, 2007. "Efficiency Consequences of Rate Regulation in Insurance Markets," NFI Policy Briefs 2007-PB-03, Indiana State University, Scott College of Business, Networks Financial Institute.
    8. Francesca Barigozzi, 2004. "Reimbursing Preventive Care," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 29(2), pages 165-186, December.
    9. Georges Dionne & Casey Rothschild, 2014. "Economic Effects of Risk Classification Bans," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(2), pages 184-221, September.
    10. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
    11. Dionne, Georges & Harrington, Scott, 2017. "Insurance and Insurance Markets," Working Papers 17-2, HEC Montreal, Canada Research Chair in Risk Management.
    12. Vickie Bajtelsmit & Paul D. Thistle, 2008. "The Reasonable Person Negligence Standard and Liability Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 815-823.
    13. M. Boyer, 2003. "Contracting under ex post moral hazard and non-commitment," Review of Economic Design, Springer;Society for Economic Design, vol. 8(1), pages 1-38, August.
    14. Bond, Eric W. & Crocker, Keith J., 1997. "Hardball and the soft touch: The economics of optimal insurance contracts with costly state verification and endogenous monitoring costs," Journal of Public Economics, Elsevier, vol. 63(2), pages 239-264, January.
    15. Schwarze, Reimund & Wein, Thomas, 2005. "Is the market classification of risk always efficient? Evidence from German third party motor insurance," German Risk and Insurance Review (GRIR), University of Cologne, Department of Risk Management and Insurance, vol. 1(4), pages 173-202.
    16. Schuhmacher, Petra, 2008. "The Demand for Enhanced Annuities," Discussion Papers in Business Administration 7954, University of Munich, Munich School of Management.
    17. Kremhelmer, Susanne, 2004. "Fairness, Property Rights, and the Market for Media," Munich Dissertations in Economics 2521, University of Munich, Department of Economics.
    18. Dwight Jaffee & Thomas Russell, 1998. "The Causes and Consequences of Rate Regulation in the Auto Insurance Industry," NBER Chapters,in: The Economics of Property-Casualty Insurance, pages 81-112 National Bureau of Economic Research, Inc.
    19. Chernew, Michael E. & Frick, Kevin D., 1999. "The impact of managed care on the existence of equilibrium in health insurance markets," Journal of Health Economics, Elsevier, vol. 18(5), pages 571-590, October.
    20. Sharon Tennyson, 2010. "Incentive Effects of Community Rating in Insurance Markets: Evidence from Massachusetts Automobile Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 35(1), pages 19-46, June.
    21. Kremhelmer, Susanne & Zenger, Hans, 2008. "Advertising and the screening role of mass media," Information Economics and Policy, Elsevier, vol. 20(2), pages 107-119, June.
    22. Susanne Kremhelmer & Hans Zenger, 2004. "Advertising and the Media," Industrial Organization 0403003, EconWPA.
    23. Mattias K. Polborn, 2008. "Endogenous Categorization in Insurance," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(6), pages 1095-1113, December.
    24. Boyer, M. Martin & Schiller, Jörg, 2003. "Merging automobile regulatory bodies: The case of Atlantic Canada," Working Papers on Risk and Insurance 11, University of Hamburg, Institute for Risk and Insurance.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jpolec:v:99:y:1991:i:1:p:177-200. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division). General contact details of provider: http://www.journals.uchicago.edu/JPE/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.