Efficiency of Competition in Insurance Markets with Adverse Selection

Giuseppe De Feo and Jean Hindriks

No 2005042, Discussion Papers (ECON - Département des Sciences Economiques) from Université catholique de Louvain, Département des Sciences Economiques

Abstract: There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad when there is adverse selection; Using the dual theory of choice under risk, we are able to fully characterize both the competitive and the monopoly market outcomes. When they are two types of risk, the monopoly dominates competition if and only if competition leads to market unravelling. When there are a continuum of types the efficiency of competition is less trivial. In effect monopoly is shown to provide better insurance but at the cost of driving out some agents from the market. Performing simulation for differnt distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. The reason is that the monopolist can exploit its market power to relax the incentive constraints

Keywords: monopoly; competition; non-expected utility; insurance; adverse selection (search for similar items in EconPapers)
JEL-codes: G22 (search for similar items in EconPapers)
Pages: 32
Date: 2005-07-01
New Economics Papers: this item is included in nep-bec, nep-com, nep-fin, nep-ias, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Efficiency of competition in insurance markets with adverse selection (2005)
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