Harmful competition in the insurance markets
Giuseppe De Feo () and
Jean Hindriks ()
No 921, Working Papers from University of Strathclyde Business School, Department of Economics
There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad and that adverse selection is in general worse under competition than under monopoly. The reason is that monopoly can exploit its market power to relax incentive constraints by cross-subsidization between different risk types. Cream-skimming behavior, on the contrary, prevents competitive firms from using implicit transfers. In effect monopoly is shown to provide better coverage to those buying insurance but at the cost of limiting participation to insurance. Performing simulation for different distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. However, most of the surplus is retained by the firm and, as a result, most individuals prefer competitive markets notwithstanding their performance is generally poorer than monopoly.
Keywords: monopoly; competition; insurance; adverse selection. (search for similar items in EconPapers)
JEL-codes: G22 H20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ias and nep-mic
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Working Paper: Harmful competition in the insurance markets (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:str:wpaper:0921
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