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Harmful competition in the insurance markets

Author

Listed:
  • Giuseppe De Feo

    () (Department of Economics, University of Strathclyde)

  • Jean Hindriks

    () (Department of Economics and CORE, Universite catholique de Louvain, Belgium)

Abstract

There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad and that adverse selection is in general worse under competition than under monopoly. The reason is that monopoly can exploit its market power to relax incentive constraints by cross-subsidization between different risk types. Cream-skimming behavior, on the contrary, prevents competitive firms from using implicit transfers. In effect monopoly is shown to provide better coverage to those buying insurance but at the cost of limiting participation to insurance. Performing simulation for different distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. However, most of the surplus is retained by the firm and, as a result, most individuals prefer competitive markets notwithstanding their performance is generally poorer than monopoly.

Suggested Citation

  • Giuseppe De Feo & Jean Hindriks, 2009. "Harmful competition in the insurance markets," Working Papers 0921, University of Strathclyde Business School, Department of Economics.
  • Handle: RePEc:str:wpaper:0921
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    References listed on IDEAS

    as
    1. Giuseppe, DE FEO & Jean, HINDRIKS, 2005. "Efficiency of Competition in Insurance Markets with Adverse Selection," Discussion Papers (ECON - Département des Sciences Economiques) 2005042, Université catholique de Louvain, Département des Sciences Economiques.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Less competition is good for insurance
      by Economic Logician in Economic Logic on 2010-05-19 19:14:00

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    Cited by:

    1. Jenny Simon, 2015. "Optimal Debt Bias in Corporate Income Taxation," CESifo Working Paper Series 5561, CESifo Group Munich.
    2. repec:eee:riibaf:v:47:y:2019:i:c:p:410-427 is not listed on IDEAS

    More about this item

    Keywords

    monopoly; competition; insurance; adverse selection.;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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