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Endogenous Information and Privacy in Automobile Insurance Markets

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Abstract

This paper examines the implications of insurers’ offering a voluntary monitoring technology to insureds in automobile insurance markets with adverse selection and without commitment. Under the consideration of the inherent costs related to the loss of privacy, the paper analyzes the incentives of insureds to reveal information, whereby they can decide how much or what quality of information to reveal. It is also allowed for the possibility that high risk individuals might mimic low risk individuals. The resulting market equilibrium is characterized and it is shown, that it will never be optimal for insureds to reject the monitoring technology and that under certain conditions, which are specified in the paper, it will be optimal for them to reveal complete information. Concerning the welfare effects both low risk and high risk individuals will always be better off. Unless it is optimal for individuals to reveal complete information, an all-or-nothing nature of the monitoring technology will not be efficient.

Suggested Citation

  • Lilia Filipova, 2006. "Endogenous Information and Privacy in Automobile Insurance Markets," Discussion Paper Series 284, Universitaet Augsburg, Institute for Economics.
  • Handle: RePEc:aug:augsbe:0284
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    File URL: http://www.wiwi.uni-augsburg.de/vwl/institut/paper/284.pdf
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    Keywords

    adverse selection; privacy; insurance; risk classification; endogenous information acquisition;

    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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    1. Studies on the automobile industry

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