19 Pages Posted: 20 May 2011
Date Written: June 2011
Crocker and Snow (1986) show that banning categorization based on risk-related characteristics such as gender or race in pricing insurance policies is inefficient whenever categorization is costless. Their analysis, by contrast, suggests ambiguous welfare effects of banningcostlycategorization. I show that this latter conclusion is incorrect: categorical pricing bans are inefficient even when categorization is costly. Whenever the ban-imposing government can instead provide breakeven partial social insurance, it can remove its ban in such a way that the insurance market will choose to employ the categorizing technology only when doing so is Pareto improving.
Suggested Citation: Suggested Citation
Rothschild, Casey, The Efficiency of Categorical Discrimination in Insurance Markets (June 2011). Journal of Risk and Insurance, Vol. 78, Issue 2, pp. 267-285, 2011. Available at SSRN: https://ssrn.com/abstract=1841258 or http://dx.doi.org/10.1111/j.1539-6975.2010.01375.x
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