Reducing Asymmetric Information in Insurance Markets: Cars with Black Boxes

Lilia Filipova () and Peter Welzel ()
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Lilia Filipova: University of Augsburg, Department of Economics

No 270, Discussion Paper Series from Universitaet Augsburg, Institute for Economics

Abstract: We examine the effects of ex post revelation of information about the risk type or the risk-reducing behavior of insureds in automobile insurance markets both for perfect competition and for monopoly. Specifically, we assume that insurers can offer a contract with information revelation ex post, i.e., after an accident has occurred, in addition to the usual second-best contracts. Under moral hazard this always leads to a Pareto-improvement of social welfare. For adverse selection we find that this is also true except when bad risks under self-selecting contracts received an information rent, i.e., under monopoly or under competition with cross-subsidization from low to high risks. Regulation can be used to establish Pareto-improvement also in these cases. Privacy concerns do not alter our positive welfare results.

Keywords: information moral hazard; adverse selection; insurance (search for similar items in EconPapers)
JEL-codes: D82 G22 (search for similar items in EconPapers)
Date: 2005-02
New Economics Papers: this item is included in nep-com, nep-fin, nep-ind and nep-mic
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:aug:augsbe:0270

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