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Reducing Asymmetric Information in Insurance Markets: Cars with Black Boxes

We examine the effects of ex post revelation of information about the risk type or the risk-reducing behavior of insureds in automobile insurance markets both for perfect competition and for monopoly. Specifically, we assume that insurers can offer a contract with information revelation ex post, i.e., after an accident has occurred, in addition to the usual second-best contracts. Under moral hazard this always leads to a Pareto-improvement of social welfare. For adverse selection we find that this is also true except when bad risks under self-selecting contracts received an information rent, i.e., under monopoly or under competition with cross-subsidization from low to high risks. Regulation can be used to establish Pareto-improvement also in these cases. Privacy concerns do not alter our positive welfare results.

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File URL: http://www.wiwi.uni-augsburg.de/vwl/institut/paper/270.pdf
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Paper provided by Universitaet Augsburg, Institute for Economics in its series Discussion Paper Series with number 270.

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Length: pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:aug:augsbe:0270
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