Competitive Insurance Markets with Two Unobservables

Posted: 20 Oct 2000

See all articles by Michael Smart

Michael Smart

University of Toronto - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

I study a screening game in a competitive insurance market in which insurance customers differ with respect to both accident probability and degree of risk aversion. It is shown that indifference curves of customers may cross twice; thus the single crossing property does not hold. When differences in risk aversion are sufficiently large, firms cannot use policy deductibles to screen high-risk customers. Types may be pooled in equilibrium or are separated by raising premiums above actuarially fair levels. This leads to excessive entry of firms in equilibrium.

Suggested Citation

Smart, Michael, Competitive Insurance Markets with Two Unobservables. Available at SSRN: https://ssrn.com/abstract=241886

Michael Smart (Contact Author)

University of Toronto - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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