To Insure or Not to Insure? Promoting Trust and Cooperation with Insurance Advice in Markets

Ben Grodeck, Franziska Tausch, Chengsi Wang and Erte Xiao

No 2022-25, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: We design and test a novel insurance advice mechanism aimed at promoting trust and cooperation in markets with asymmetric information. In a buyer-seller game, sellers have the option to advise buyers on whether to purchase third-party insurance against the potential losses from the opportunistic behavior of strategic sellers. The theoretical model suggests that both cooperative and strategic sellers advise buyers not to purchase insurance. Once this advice has been given, strategic sellers are less likely to pursue self-interest due to associated psychological costs. We conduct a controlled laboratory experiment and show that the insurance advice mechanism significantly increases market efficiency, with sellers being more likely to cooperate with buyers and buyers being more likely to purchase from sellers.

Keywords: asymmetric information; insurance; trust; cooperation; experimental economics (search for similar items in EconPapers)
JEL-codes: C91 D47 D82 D9 L86 (search for similar items in EconPapers)
Date: 2022-12-01
New Economics Papers: this item is included in nep-exp, nep-gth and nep-soc
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Journal Article: To insure or not to insure? Promoting trust and cooperation with insurance advice in markets (2023)
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