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Costly risk verification without commitment in competitive

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  • Pierre Picard

    (CECO - Laboratoire d'économétrie de l'École polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

Abstract

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.

Suggested Citation

  • Pierre Picard, 2005. "Costly risk verification without commitment in competitive," Working Papers hal-00243023, HAL.
  • Handle: RePEc:hal:wpaper:hal-00243023
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00243023
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    File URL: https://hal.archives-ouvertes.fr/hal-00243023/document
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    References listed on IDEAS

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    1. A. Dixit & P. Picard, 2002. "On the Role of Good Faith in Insurance Contracting," Princeton Economic Theory Working Papers 26c6897fd1cd46f8f39ffb6ca, David K. Levine.
    2. 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.
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