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Competitive Screening in Insurance Markets with Endogenous Wealth Heterogeneity

  • Nick Netzer

    ()

    (Socioeconomic Institute, University of Zurich)

  • Florian Scheuer

    ()

    (Massachusetts Institute of Technology)

We examine equilibria in competitive insurance markets with adverse selection when wealth differences arise endogenously from unobservable savings or labor supply decisions. The endogeneity of wealth implies that high risk individuals may ceteris paribus exhibit the lower marginal willingness to pay for insurance than low risks, a phenomenon that we refer to as irregular-crossing preferences. In our model, both risk and patience (or productivity) are privately observable. In contrast to the models in the existing literature, where wealth heterogeneity is exogenously assumed, equilibria in our model no longer exhibit a monotone relation between risk and coverage. Individuals who purchase larger coverage are no longer higher risks, a phenomenon frequently observed in empirical studies.

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File URL: http://www.soi.uzh.ch/research/wp/2009/wp0907.pdf
File Function: revised version, 2009
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Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0907.

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Length: 28 pages
Date of creation: Apr 2009
Date of revision: Jun 2009
Publication status: published in Economic Theory 44, pp. 187-211, 2010
Handle: RePEc:soz:wpaper:0907
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  1. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
  2. Chassagnon, A. & Chiappori, P.A., 1994. "Insurance Under Moral Hazard and Adverse Selection: The Case of Pure Competition," Papers 28, Laval - Laboratoire Econometrie.
  3. Nick Netzer & Florian Scheuer, 2008. "Competitive Markets without Commitment," SOI - Working Papers 0814, Socioeconomic Institute - University of Zurich.
  4. Eric M. Engen & Jonathan Gruber, 1995. "Unemployment Insurance and Precautionary Saving," NBER Working Papers 5252, National Bureau of Economic Research, Inc.
  5. Jullien, Bruno & Salanié, Bernard & Salanié, François, 2001. "Screening Risk-Averse Agents Under Moral Hazard," IDEI Working Papers 131, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Amy Finkelstein & Kathleen McGarry, 2003. "Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance," NBER Working Papers 9957, National Bureau of Economic Research, Inc.
  7. Alberto Bisin & Piero Gottardi, 2005. "Efficient Competitive Equilibria with Adverse Selection," CESifo Working Paper Series 1504, CESifo Group Munich.
  8. de Meza, David & Webb, David C, 2001. "Advantageous Selection in Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 249-62, Summer.
  9. Raj Chetty & Emmanuel Saez, 2010. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," NBER Chapters, in: Income Taxation, Trans-Atlantic Public Economics Seminar (TAPES), pages 85-114 National Bureau of Economic Research, Inc.
  10. Villeneuve, Bertrand, 2003. "Concurrence et antisélection multidimensionnelle en assurance," Economics Papers from University Paris Dauphine 123456789/5370, Paris Dauphine University.
  11. Netzer, Nick & Scheuer, Florian, 2007. "Taxation, insurance, and precautionary labor," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1519-1531, August.
  12. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, 04.
  13. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  14. John Cawley & Tomas Philipson, 1996. "An Empirical Examination of Information Barriers to Trade in Insurance," NBER Working Papers 5669, National Bureau of Economic Research, Inc.
  15. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
  16. Hemenway, David, 1990. "Propitious Selection," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 1063-69, November.
  17. Robin Boadway & Manuel Leite-Monteiro & Maurice Marchand & Pierre Pestieau, 2006. "Social Insurance and Redistribution with Moral Hazard and Adverse Selection," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(2), pages 279-298, 07.
  18. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
  19. Douglas Gale, 1994. "Equilibria and Pareto Optima of Markets with Adverse Selection," Papers 0046, Boston University - Industry Studies Programme.
  20. Hellwig,Martin, 1986. "Some recent developments in the theory of competition in markets with adverse selection," Discussion Paper Serie A 82, University of Bonn, Germany.
  21. Jeffrey R. Brown & Amy Finkelstein, 2009. "The Private Market for Long-Term Care Insurance in the United States: A Review of the Evidence," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(1), pages 5-29.
  22. Stewart, Jay, 1994. "The Welfare Implications of Moral Hazard and Adverse Selection in Competitive Insurance Markets," Economic Inquiry, Western Economic Association International, vol. 32(2), pages 193-208, April.
  23. Smart, Michael, 2000. "Competitive Insurance Markets with Two Unobservables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 153-69, February.
  24. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
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