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

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  • Georges Dionne
  • Pierre-Carl Michaud
  • Maki Dahchour

Abstract

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.

Suggested Citation

  • Georges Dionne & Pierre-Carl Michaud & Maki Dahchour, 2004. "Separating Moral Hazard from Adverse Selection in Automobile Insurance: Longitudinal Evidence from France," Cahiers de recherche 0420, CIRPEE.
  • Handle: RePEc:lvl:lacicr:0420
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    References listed on IDEAS

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    1. Dionne, Georges & Doherty, Neil A, 1994. "Adverse Selection, Commitment, and Renegotiation: Extension to and Evidence from Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 209-235, April.
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    Citations

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    Cited by:

    1. Martin Spindler & Joachim Winter & Steffen Hagmayer, 2014. "Asymmetric Information in the Market for Automobile Insurance: Evidence From Germany," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(4), pages 781-801, December.
    2. Dionne, Georges & Michaud, Pierre-Carl & Pinquet, Jean, 2013. "A review of recent theoretical and empirical analyses of asymmetric information in road safety and automobile insurance," Research in Transportation Economics, Elsevier, vol. 43(1), pages 85-97.
    3. Lilia Filipova, 2007. "Monitoring and Privacy in Automobile Insurance Markets with Moral Hazard," Discussion Paper Series 293, Universitaet Augsburg, Institute for Economics.
    4. repec:mea:meawpa:12259 is not listed on IDEAS
    5. Yarmukhamedov, Sherzod, 2013. "Empirical analysis of moral hazard: a study of a vehicle insurance tax reform," Working papers in Transport Economics 2013:14, CTS - Centre for Transport Studies Stockholm (KTH and VTI).

    More about this item

    Keywords

    Automobile insurance; road safety; asymmetric information; experience rating; moral hazard; adverse selection; dynamic panel data models; Granger causality test;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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