Adverse Selection, Commitment, and Renegotiation

Extension to and Evidence from Insurance Markets

Bibliographic Data

ID10173244
AuthorsGeorges Dionne (0000-0002-0578-1083), Neil A Doherty
Year1994
Volume102
Issue2
Pages209-235
Publication date1994-04-01
Open AccessNo
TypeARTICLE
VenueJournal of Political Economy (JOURNAL)
Journal identifiersISSN: 0022-3808 • E-ISSN: 1537-534X
PublisherUniversity of Chicago Press (PUBLISHER • US)
DOI10.1086/261929
OpenAlexW2155449113
LanguageEN
Citations received8
References cited2

With asymmetric information, full commitment to long-term contracts may permit markets to approach first-best allocations. However, commitment can be undermined by opportunistic behavior, notably renegotiation. The authors reexamine commitment in insurance markets. They present an alternative model (which extends Jean-Jaques Laffont and Jean Tirole's procurement model to address uncertainty and competition), which involves semipooling in the first period followed by separation. This and competing models (e.g., single-period models and no-commitment models) have different predictions concerning temporal patterns of insurer profitability. A test using California data suggests that some automobile insurers use commitment to attract selective portfolios comprising disproportionate numbers of low risks. Copyright 1994 by University of Chicago Press

Adverse selection · Business · Commitment device · Competition (biology · Economics · Extension (predicate logic · Information asymmetry · Microeconomics · Procurement · Profitability index · Selection (genetic algorithm · Test (biology · Computer Science · Finance · Healthcare Policy and Management · Insurance and Financial Risk Management · Insurance, Mortality, Demography, Risk Management · Marketing

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