Supply, demand, and selection in insurance markets: Theory and applications in pictures

Casey Rothschild and Paul D. Thistle

Risk Management and Insurance Review, 2022, vol. 25, issue 4, 419-444

Abstract: This paper recapitulates and extends the Einav, Finkelstein, and Cullen (EFC) approach to modeling equilibrium in insurance markets. After describing the basic EFC model and showing that it can be understood as a supply–demand model, we show how it can be extended to: markets featuring nonexclusive contracting and linear pricing; markets featuring selection on ex‐ante moral hazard; and multiple‐margin markets with price competition over two coverage tiers. In markets with nonexclusive‐contracting‐cum‐linearly pricing, we show that the EFC model, graphs, and lessons all go through, essentially unchanged. In markets with selection on moral hazard, we show that two natural notions of adverse selection—notions that coincide in the basic EFC framework—may diverge. This divergence is a result of the fact that, with moral hazard, the average cost curve measured by EFC can no longer be interpreted as a supply curve. Finally, in a two‐tier market, we show that the lessons depend on whether contracts are offered “simultaneously” or “sequentially,” where coverage is purchased in layers.

Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://doi.org/10.1111/rmir.12233

Related works:
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:bla:rmgtin:v:25:y:2022:i:4:p:419-444

Access Statistics for this article

Risk Management and Insurance Review is currently edited by Mary A. Weiss

More articles in Risk Management and Insurance Review from American Risk and Insurance Association
Bibliographic data for series maintained by Wiley Content Delivery ().