Costly risk verification without commitment in competitive
This paper analyzes the equilibrium of an insurance market where applicants for insurance have a duty of good faith when they reveal private information about their risk type. Insurers can, at some cost, verify the type of insureds who file a claim and they are allowed to retroactively void the insurance contract if it is established that the policyholder has misrepresented his risk when the contract was taken out. However, insurers cannot precommit to their risk verification strategy. The paper analyzes the relationship between second-best Pareto-optimality and the insurance market equilibrium in a game theoretic framework. It characterizes the contracts offered at equilibrium, the individuals' contract choice as well as the conditions under which an equilibrium exists.
|Date of creation:||2005|
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Crocker, Keith J. & Snow, Arthur, 1985. "The efficiency of competitive equilibria in insurance markets with asymmetric information," Journal of Public Economics, Elsevier, vol. 26(2), pages 207-219, March.
- A. Dixit & P. Picard, 2002.
"On the Role of Good Faith in Insurance Contracting,"
Princeton Economic Theory Working Papers
26c6897fd1cd46f8f39ffb6ca, David K. Levine.
- A. Dixit & P. Picard, 2002. "On the Role of Good Faith in Insurance Contracting," THEMA Working Papers 2002-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
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