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Time Deductibles as Screening Devices: Competitive Markets

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  • Jaap Spreeuw
  • Martin Karlsson

Abstract

Seminal papers on asymmetric information in competitive insurance markets, analyzing the monetary deductible as a screening device, show that any existing equilibrium is of a separating type. High risks buy complete insurance, whereas low risks buy partial insurance—and this result holds for the Nash behavior as well as for the Wilson foresight. In this article, we analyze the strength of screening based on limitations to the period of coverage of the contract. We show that in this case (1) the Nash equilibrium may entail low risks not purchasing any insurance at all, and (2) under the Wilson foresight, a pooling equilibrium may exist.

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  • Jaap Spreeuw & Martin Karlsson, 2009. "Time Deductibles as Screening Devices: Competitive Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 261-278, June.
    • Handle: RePEc:bla:jrinsu:v:76:y:2009:i:2:p:261-278
    DOI: 10.1111/j.1539-6975.2009.01298.x
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    References listed on IDEAS

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    1. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
    2. Joseph E. Stiglitz, 1977. "Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 407-430.
    3. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    4. Hajime Miyazaki, 1977. "The Rat Race and Internal Labor Markets," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 394-418, Autumn.
    5. Crocker, Keith J. & Snow, Arthur, 1985. "The efficiency of competitive equilibria in insurance markets with asymmetric information," Journal of Public Economics, Elsevier, vol. 26(2), pages 207-219, March.
    6. Jaap Spreeuw, 2005. "The Probationary Period as a Screening Device: The Monopolistic Insurer," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 30(1), pages 5-14, June.
    7. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
    8. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
    9. Harris Milton & Townsend, Robert M, 1981. "Resource Allocation under Asymmetric Information," Econometrica, Econometric Society, vol. 49(1), pages 33-64, January.
    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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    Cited by:

    1. Ben‐jiang Ma & Jing‐yu Ye & Geng Liu & Yuan‐ji Huang, 2020. "Adverse selection, limited compensation, and the design of environmental liability insurance contract in the case of enterprise bankruptcy," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(7), pages 1327-1337, October.
    2. Ben‐jiang Ma & Jing‐yu Ye & Yuan‐ji Huang & Muhammad Farhan Bashir, 2020. "Research of two‐period insurance contract model with a low compensation period under adverse selection," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(3), pages 293-307, April.
    3. Ma, Ben-jiang & Qiu, Chun-guang & Bi, Wen-jie, 2015. "An insurance contract with a low compensation period under adverse selection," Information Economics and Policy, Elsevier, vol. 31(C), pages 67-74.

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