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Dynamic Insurance and Adverse Selection

Author

Listed:
  • Maarten C.W. Janssen

    (Erasmus University Rotterdam)

  • Vladimir A. Karamychev

    (Erasmus University Rotterdam)

Abstract

This discussion paper led to a publication in the Journal of Risk and Insurance . Vol. 72(1), pages 45-59. We take a dynamic perspective on insurance markets under adverseselection and study a generalized Rothschildand Stiglitz model where agents may differ with respect to theaccidental probability and their expenditure levels incase an accident occurs. We investigate the nature of dynamicinsurance contracts by considering both conditionaland unconditional dynamic contracts. An unconditional dynamiccontract has insurance companies offeringcontracts where the terms of the contract depend on time, but not onthe occurrence of past accidents. Conditionaldynamic contracts make the actual contract also depend on individualpast performance (like in car insurances). Weinvestigate whether allowing insurance companies to offer dynamicinsurance contracts results in Pareto-improvements over static contracts. Our main results are as follows.When agents only differ in their accidentalexpenditures, then dynamic insurance contracts yield a welfareimprovement only if dynamic contracts areconditional on past performance. When, however, agents' expendituresdiffer just a little bit dynamic insurancecontracts are strictly Pareto improving even for unconditionaldynamic contracts.

Suggested Citation

  • Maarten C.W. Janssen & Vladimir A. Karamychev, 2001. "Dynamic Insurance and Adverse Selection," Tinbergen Institute Discussion Papers 01-106/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20010106
    as

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    File URL: https://papers.tinbergen.nl/01106.pdf
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    References listed on IDEAS

    as
    1. Cooper, Russell & Hayes, Beth, 1987. "Multi-period insurance contracts," International Journal of Industrial Organization, Elsevier, vol. 5(2), pages 211-231.
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    3. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    4. Crocker, Keith J & Snow, Arthur, 1986. "The Efficiency Effects of Categorical Discrimination in the Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 321-344, April.
    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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Insurance; Asymmetric Information; Screening;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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