Competitive Insurance Markets and Adverse Selection in the Lab

Dorra Riahi Berraies (), Louis Lévy-Garboua and Claude Montmarquette

The Geneva Risk and Insurance Review, 2013, vol. 38, issue 1, 87-113

Abstract: We provide an experimental analysis of competitive insurance markets with adverse selection. Our parameterised version of the lemons’ model of Akerlof in the insurance context predicts total crowding-out of low risks when insurers offer a single full insurance contract. The therapy proposed by Rothschild and Stiglitz consists of adding a partial insurance contract so as to obtain self-selection of risks. We test the theoretical predictions of these two models in two experiments. A clean test is obtained by matching the parameters of these experiments and by controlling for the risk neutrality of insurers and the common risk aversion of their clients by means of the binary lottery procedure. The results reveal a partial crowding-out of low risks in the first experiment. Crowding-out is not eliminated in the second experiment and it is not even significantly reduced. Finally, instead of the predicted separating equilibrium, we find pooling equilibria. The latter can be sustained because insureds who objectively differ in their risk level do not perceive themselves as being so much different.

Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.palgrave-journals.com/grir/journal/v38/n1/pdf/grir20125a.pdf Link to full text PDF (application/pdf)
http://www.palgrave-journals.com/grir/journal/v38/n1/full/grir20125a.html Link to full text HTML (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Competitive Insurance Markets and Adverse Selection in the Lab (2013)
Working Paper: Competitive Insurance Markets and Adverse Selection in the Lab (2013)
Working Paper: Competitive Insurance Markets and Adverse Selection in the Lab (2013)
Working Paper: Competitive Insurance Markets and Adverse Selection in the Lab (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:genrir:v:38:y:2013:i:1:p:87-113

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10713

Access Statistics for this article

The Geneva Risk and Insurance Review is currently edited by Michael Hoy and Nicolas Treich

More articles in The Geneva Risk and Insurance Review from Palgrave Macmillan, International Association for the Study of Insurance Economics (The Geneva Association) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().