To insure or not to insure? Promoting trust and cooperation with insurance advice in markets

Ben Grodeck, Franziska Tausch, Chengsi Wang and Erte Xiao

European Economic Review, 2023, vol. 160, issue C

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 with third-party insurance, sellers have the option to advise buyers on whether to purchase insurance against the potential losses from the opportunistic behavior of strategic sellers. We hypothesize that advising not to purchase insurance introduces a psychological cost for defection. We develop a theoretical model that selects a pooling equilibrium where both cooperative and strategic sellers advise buyers not to purchase insurance. Once this advice has been given, strategic sellers choose not to defect if the associated psychological costs are sufficiently large. Data from a controlled laboratory experiment shows that the insurance advice mechanism significantly increases market efficiency, with buyers being more likely to purchase from sellers and sellers being more likely to cooperate. Furthermore, we find that the insurance advice mechanism is more effective when sellers can observe buyers’ insurance purchase decisions.

Keywords: Asymmetric information; Insurance; Trust; Cooperation; Communication; Experimental economics (search for similar items in EconPapers)
JEL-codes: C91 D47 D82 D9 L86 (search for similar items in EconPapers)
Date: 2023
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Working Paper: To Insure or Not to Insure? Promoting Trust and Cooperation with Insurance Advice in Markets (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:160:y:2023:i:c:s0014292123002143

DOI: 10.1016/j.euroecorev.2023.104586

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