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Agent Discretion and the Choice of Insurance Marketing System

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  • Regan, Laureen
  • Tennyson, Sharon

Abstract

This article argues that different insurance marketing organizations arise as a means to minimize the costs of correctly matching policyholder risks with insurance coverage. When policymakers are easily sorted without sales agent participation in screening, exclusive dealing will be the preferred marketing organization; when agent information is important for risk placement, independent agency may be preferred. Empirical support for our theory is obtained from analysis of compensation contracts and market shares of the different marketing forms. Exclusive dealers are found to be prevalent in relatively standardized, homogeneous product lines and markets, and their agents receive less profit-based compensation than those of independent agency insurers. These findings are consistent with our theory. Copyright 1996 by the University of Chicago.

Suggested Citation

  • Regan, Laureen & Tennyson, Sharon, 1996. "Agent Discretion and the Choice of Insurance Marketing System," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 637-666, October.
    • Handle: RePEc:ucp:jlawec:v:39:y:1996:i:2:p:637-66
    DOI: 10.1086/467361
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    References listed on IDEAS

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    1. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    2. Marvel, Howard P, 1982. "Exclusive Dealing," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 1-25, April.
    3. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    4. Lewis, Tracy R & Sappington, David E M, 1989. "Inflexible Rules in Incentive Problems," American Economic Review, American Economic Association, vol. 79(1), pages 69-84, March.
    5. John, George & Weitz, Barton A, 1988. "Forward Integration into Distribution: An Empirical Test of Transaction Cost Analysis," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(2), pages 337-355, Fall.
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