Price Adjustment in an Automobile Insurance Market: A Test of the Sheshinski-Weiss Model

Bev Dahlby ()

Canadian Journal of Economics, 1992, vol. 25, issue 3, 564-83

Abstract: Nominal price rigidity is explained in the Sheshinski-Weiss (SW) model by costly price adjustment. The predictions of the SW model, which describe a firm's optimal forward-looking price adjustment strategy, were derived and tested using microdata on the timing and the magnitude of premium changes by sixty-nine firms in the Alberta automobile insurance market over the period 1974-82. The model was tested by estimating the structural equations of the model, probit equations for premium changes, and reduced-form equations for the firm's new premium and its old premium. The overall conclusion is that the SW model does not explain the price adjustments observed in the Alberta automobile insurance market.

Date: 1992
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