Insurance, Consumer Search, and Equilibrium Price Distributions

33 Pages Posted: 17 May 2014

See all articles by Ş. Nuray Akın

Ş. Nuray Akın

University of Miami - School of Business Administration - Department of Economics

Brennan C Platt

Brigham Young University - Department of Economics

Date Written: June 2014

Abstract

We examine a service market with two frictions: search is required to obtain price quotes, and insurance coverage for the service reduces household search effort. While fewer draws from a price distribution will directly raise a household's average price, the indirect effect of reduced search on price competition has a much greater impact, accounting for at least 89 percent of increased average expenditures. In this environment, a monopolist insurer will exacerbate the moral hazard by offering full insurance. A competitive insurance market typically results in partial insurance and significant price dispersion, yet a second‐best contract would offer even less insurance coverage.

Suggested Citation

Akın, Ş. Nuray and Platt, Brennan C, Insurance, Consumer Search, and Equilibrium Price Distributions (June 2014). Journal of Risk and Insurance, Vol. 81, Issue 2, pp. 397-429, 2014, Available at SSRN: https://ssrn.com/abstract=2438131 or http://dx.doi.org/10.1111/j.1539-6975.2013.01515.x

Ş. Nuray Akın (Contact Author)

University of Miami - School of Business Administration - Department of Economics

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

Brennan C Platt

Brigham Young University - Department of Economics ( email )

130 Faculty Office Bldg.
Provo, UT 84602-2363
United States
801-422-8904 (Phone)

HOME PAGE: http://econ.byu.edu

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