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Insurance Markets When Firms Are Asymmetrically Informed: A Note

  • Jason Strauss
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    We examine welfare effects of the entry of a single well-informed insurance firm into a competitive insurance market. We show that the effect depends on the structure of the market. If competitive insurers rely on the standard self-selection mechanism of a menu of contracts, then the entry of a single well-informed firm which can discriminate costlessly between consumer risk types will increase welfare. In contrast, if consumers do not know their own risk type, then the introduction of a well-informed insurer may reduce welfare.

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    Paper provided by Department of Economics, University of Calgary in its series Working Papers with number 2007-18.

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    Date of creation: 30 Nov 2007
    Date of revision: 30 Nov 2007
    Handle: RePEc:clg:wpaper:2007-18
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    1. Crocker, Keith J & Snow, Arthur, 1986. "The Efficiency Effects of Categorical Discrimination in the Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 321-44, April.
    2. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
    3. Georges Dionne & Christian Gourieroux & Charles Vanasse, 2001. "Testing for Evidence of Adverse Selection in the Automobile Insurance Market: A Comment," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 444-473, April.
    4. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
    5. Pedro Pita Barros, 1993. "Freedom of Services and Competition in Insurance Markets: A Note," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 18(1), pages 93-101, June.
    6. Kuniyoshi Saito, 2006. "Testing for Asymmetric Information in the Automobile Insurance Market Under Rate Regulation," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(2), pages 335-356.
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