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Reducing Asymmetric Information in Insurance Markets: Cars with Black Boxes

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Abstract

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.

Suggested Citation

  • Lilia Filipova & Peter Welzel, 2005. "Reducing Asymmetric Information in Insurance Markets: Cars with Black Boxes," Discussion Paper Series 270, Universitaet Augsburg, Institute for Economics.
  • Handle: RePEc:aug:augsbe:0270
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    File URL: https://www.wiwi.uni-augsburg.de/vwl/institut/paper/270.pdf
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    Cited by:

    1. Aidan Hollis & Jason Strauss, "undated". "Privacy, Driving Data and Automobile Insurance: An Economic Analysis," Working Papers 2008-13, Department of Economics, University of Calgary, revised 14 Feb 2008.
    2. Gemmo, Irina & Browne, Mark J. & Gr√ľndl, Helmut, 2017. "Transparency aversion and insurance market equilibria," ICIR Working Paper Series 25/17, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).

    More about this item

    Keywords

    information moral hazard; adverse selection; insurance;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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