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The Efficiency of Categorical Discrimination in Insurance Markets

19 Pages Posted: 20 May 2011  

Casey Rothschild

Wellesley College

Date Written: June 2011

Abstract

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

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

Casey Rothschild (Contact Author)

Wellesley College ( email )

106 Central St.
Wellesley, MA 02181
United States

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