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To commit or not to commit: A health insurance monopoly with variable quality and uncertain types of individuals


  • Kifmann, Mathias


This paper examines the trade-off between risk allocation and quality supply for an insurance monopolist when individuals face two kinds of risk related to health. First, they may suffer an ordinary monetary loss. Second, they are subject to uncertain premiums because their type may change. We assume that neither quality of insurance service,nor the individual type is verifiable in front of a court. We show that no-commitment is a necessary condition for the efficient supply of unverifiable quality while the insurance of premium risk requires commitment. Profit-maximizing contracts may involve full, partial or no- commitment. Risk allocation or quality supply is inefficient.

Suggested Citation

  • Kifmann, Mathias, 1997. "To commit or not to commit: A health insurance monopoly with variable quality and uncertain types of individuals," Discussion Papers, Series I 288, University of Konstanz, Department of Economics.
  • Handle: RePEc:zbw:kondp1:288

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    References listed on IDEAS

    1. James W. Friedman, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 1-12.
    2. Dionne, G. & Doherty, N., 1991. "Adverse Selection in Insurance Markets: a Selective Survey," Cahiers de recherche 9105, Universite de Montreal, Departement de sciences economiques.
    3. Diamond, Peter, 1992. "Organizing the Health Insurance Market," Econometrica, Econometric Society, vol. 60(6), pages 1233-1254, November.
    4. Ronald D. Fischer & Pablo Serra, 1997. "Análisis económico del sistema de seguros de salud en Chile," Documentos de Trabajo 17, Centro de Economía Aplicada, Universidad de Chile.
    5. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
    6. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    7. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-473, June.
    8. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    9. Pauly, Mark V & Kunreuther, Howard & Hirth, Richard, 1995. "Guaranteed Renewability in Insurance," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 143-156, March.
    10. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
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    More about this item


    health insurance; premium risk; unverifiable quality; commitment;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • I10 - Health, Education, and Welfare - - Health - - - General


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