Price Subsidies and the Demand for Automobile Insurance

20 Pages Posted: 18 Mar 2021

See all articles by Boheng Su

Boheng Su

University of Alabama - Department of Economics, Finance and Legal Studies

Sharon L. Tennyson

Cornell University - Department of Policy Analysis & Management (PAM)

Date Written: March 17, 2021

Abstract

This paper tests for regulation-induced adverse selection in the Massachusetts automobile insurance market during the regulated period 1990-2005. The paper demonstrates the application of the Poterba-Finkelstein (2014) unused-observables test for adverse selection in a regulated insurance market using group-level panel data. Differences between rates that incorporate state-mandated restrictions and those based on actuarial estimates provide data on the unused-observables needed for the test. Consistent with regulation-induced adverse selection, unused observables are statistically significant and positive in estimated models of both insurance purchases and loss costs. Robustness checks support the inference that higher-risk drivers account for the results.

Keywords: Adverse Selection, Unused-observable test, Insurance Regulation

JEL Classification: G22, G28

Suggested Citation

Su, Boheng and Tennyson, Sharon L., Price Subsidies and the Demand for Automobile Insurance (March 17, 2021). Available at SSRN: https://ssrn.com/abstract=3806219 or http://dx.doi.org/10.2139/ssrn.3806219

Boheng Su (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
6073423190 (Phone)

Sharon L. Tennyson

Cornell University - Department of Policy Analysis & Management (PAM) ( email )

252 MVR Hall
Ithaca, NY 14853
United States
607-255-2619 (Phone)
607-255-4071 (Fax)

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