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Separating Moral Hazard from Adverse Selection in Automobile Insurance: Longitudinal Evidence from France

  • Georges Dionne
  • Pierre-Carl Michaud
  • Maki Dahchour

This paper uses longitudinal data to perform tests of asymmetric information in the French automobile insurance market for the 1995-1997 period. This market is characterized by the presence of a regulated experience-rating scheme (bonus-malus). We demonstrate that the result of the test depends crucially on how the dynamic process between insurance claims and contract choice is modelled. We apply a Granger causality test controlling for the unobservables. We find evidence of moral hazard which we distinguish from adverse selection using a multivariate dynamic panel data model. Experience rating appears to lead high risk policyholders to choose contracts that involve less coverage over time. These policyholders respond to contract changes by increasing their unobservable efforts to reduce claims.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0420.

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Date of creation: 2004
Date of revision:
Handle: RePEc:lvl:lacicr:0420
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  9. Jean Pinquet & Pierre-André Chiappori & Jaap Abbring & James J Heckman, 2003. "Adverse selection and moral hazard in insurance: can dynamic data help to distinguish?," Post-Print hal-00397115, HAL.
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  17. Genesove, David, 1993. "Adverse Selection in the Wholesale Used Car Market," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 644-65, August.
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  24. J. Pinquet, 1997. "Experience rating through heterogeneous models," THEMA Working Papers 97-25, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
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  26. Arulampalam, W., 1998. "A Note on Estimated Coefficients in Random Effects Probit Models," The Warwick Economics Research Paper Series (TWERPS) 520, University of Warwick, Department of Economics.
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