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Prevention in insurance markets

Marie-Cecile Fagart and Bidénam Kambia-Chopin

Annals of Economics and Statistics, 2006, issue 82, 55-70

Abstract: This paper considers a competitive insurance market under moral hazard and adverse selection, in which preventive efforts and self-protection costs are unobservable by insurance companies. Under reasonable assumptions, the conclusions of Rothschild and Stiglitz (1976) are preserved in our context even if it involves moral hazard. The riskier agents in equilibrium, who would also be the riskier agents under perfect information, receive their moral hazard contract. For other agents, adverse selection reduces coverage, increasing likewise their preventive effort with respect to the hidden-action situation.

Date: 2006
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