What Makes Insurance Companies Voluntarily Share Proprietary Customer Information?

Abstract

Many markets, such as the insurance and credit markets, are characterized by information asymmetry between firms and their clients. A cornerstone of these markets are the information exchanges, which process and distribute the voluminous customer information that member companies report to them voluntarily. Such institutions greatly alleviate the problem of information asymmetry in the markets. This paper provides a novel game-theoretic explanation for why such voluntary information-sharing arrangements can be self-enforcing --- namely, why the information exchanges, organized as independent for-profit corporations, can count on insurance companies and banks to continue to report their private customer information to them.

Keywords: Information Sharing, Adverse Selection, Insurance Markets

JEL Classification: D82, G14, G21, G22, L13