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To Insure or Not to Insure? Promoting Trust and Cooperation with Insurance Advice in Markets

Author

Listed:
  • Ben Grodeck

    (Department of Economics, Monash University)

  • Franziska Tausch

    (Tausch: Stepstone)

  • Chengsi Wang

    (Department of Economics, Monash University)

  • Erte Xiao

    (Department of Economics, Monash University)

Abstract

We design and test a novel insurance advice mechanism aimed at promoting trust and cooperation in markets with asymmetric information. In a buyer-seller game, sellers have the option to advise buyers on whether to purchase third-party insurance against the potential losses from the opportunistic behavior of strategic sellers. The theoretical model suggests that both cooperative and strategic sellers advise buyers not to purchase insurance. Once this advice has been given, strategic sellers are less likely to pursue self-interest due to associated psychological costs. We conduct a controlled laboratory experiment and show that the insurance advice mechanism significantly increases market efficiency, with sellers being more likely to cooperate with buyers and buyers being more likely to purchase from sellers. Furthermore, we find that the insurance advice mechanism is more effective when sellers observe buyers’ insurance purchase decisions.

Suggested Citation

  • Ben Grodeck & Franziska Tausch & Chengsi Wang & Erte Xiao, 2022. "To Insure or Not to Insure? Promoting Trust and Cooperation with Insurance Advice in Markets," Monash Economics Working Papers 2022-25, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2022-25
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    References listed on IDEAS

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    More about this item

    Keywords

    asymmetric information; insurance; trust; cooperation; experimental economics;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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