ADVERSE SELECTION, COMMITMENT AND RENEGOTIATION: EXTENSION TO AND EVIDENCE FROM INSURANCE MARKETS

Under conditions of asymmetric information, commitment to long term contracts may permit markets to approach first best allocations. However, commitment is fragile and may be undermined by opportunistic behaviour, notabley renegotiation. This paper examines the role of commitment in insurance markets. It shows that fully separating strategies, when renegotiation proofed, offers the same ex ante welfare as a replication of single period equilibria. The authors present an alternative model (which extends Laffont and Tirole's 1990 model of procurement to address uncertainty and competition), which involves partial pooling in the first period followed by separation. This, and competing models (e.g. commitment models, single period models and "no commitment" models) have different testable predictions concerning the temporal patterns of insurer profitability. While fairly broad tests using U.S. property liability insurers favor the "no commitment" model, more focussed tests on California data suggest that some automobile insurers do use commitment to attract selective portfolios comprising disproportionate numbers of low risks. (A)

  • Corporate Authors:

    CENTRE DE RECHERCHE SUR LES TRANSPORTS. UNIVERSITE DE MONTREAL

    C.P. 6128, SUCCURSALE A
    MONTREAL, QUEBEC  Canada  H3C 3J7
  • Authors:
    • Dionne, G
  • Publication Date: 1991

Language

  • English

Media Info

Subject/Index Terms

Filing Info

  • Accession Number: 00674446
  • Record Type: Publication
  • Source Agency: Transportation Association of Canada (TAC)
  • Files: ITRD
  • Created Date: Mar 8 1995 12:00AM