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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.econ.uzh.ch/static/wp_soi/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. Netzer, Nick & Scheuer, Florian, 2007. "Taxation, insurance, and precautionary labor," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1519-1531, August.
  2. Raj Chetty & Emmanuel Saez, 2008. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," NBER Working Papers 14403, National Bureau of Economic Research, Inc.
  3. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  4. Gale, Douglas, 1996. "Equilibria and Pareto Optima of Markets with Adverse Selection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 207-35, February.
  5. 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.
  6. Nick Netzer & Florian Scheuer, 2010. "Competitive Markets without Commitment," NajEcon Working Paper Reviews 814577000000000462, www.najecon.org.
  7. Alberto Bisin & Piero Gottardi, 2005. "Efficient Competitive Equilibria with Adverse Selection," CESifo Working Paper Series 1504, CESifo Group Munich.
  8. Jullien, Bruno & Salanié, Bernard & Salanié, François, 2001. "Screening Risk Averse Agents Under Moral Hazard," CEPR Discussion Papers 3076, C.E.P.R. Discussion Papers.
  9. 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.
  10. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  11. 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.
  12. 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.
  13. 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.
  14. Michael Smart, 1996. "Competitive Insurance Markets with Two Unobservables," Working Papers msmart-96-01, University of Toronto, Department of Economics.
  15. Chassagnon, A. & Chiappori, P.A., 1994. "Insurance Under Moral Hazard and Adverse Selection: The Case of Pure Competition," Papers 28, Laval - Laboratoire Econometrie.
  16. 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.
  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. David Hemenway, 1990. "Propitious Selection," The Quarterly Journal of Economics, Oxford University Press, vol. 105(4), pages 1063-1069.
  19. 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.
  20. 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.
  21. Hanming Fang & Michael P. Keane & Dan Silverman, 2006. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," NBER Working Papers 12289, National Bureau of Economic Research, Inc.
  22. repec:adr:anecst:y:2003:i:69:p:06 is not listed on IDEAS
  23. 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.
  24. Eric M. Engen & Jonathan Gruber, 1995. "Unemployment Insurance and Precautionary Saving," NBER Working Papers 5252, National Bureau of Economic Research, Inc.
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