When Prices Hardly Matter: Incomplete Insurance Contracts and Markets for Repair Goods
35 Pages Posted: 14 Jan 2005 Last revised: 30 Oct 2012
Date Written: October 30, 2012
Abstract
This paper looks at markets characterized by the fact that the demand side is insured. In these markets, a consumer purchases a good to compensate consequences of unfavorable events, such as an accident or an illness. Insurance policies in most lines of insurance base indemnity on the insured’s actual expenses, i.e., the insured would be partially or completely reimbursed when purchasing certain goods. In this setting, we discuss the interaction between insurance and repair markets by focusing, on one hand, upon the development of prices and the structure of markets with insured consumers, and, on the other hand, the resulting backlash on optimal insurance contracting. We show that even in the absence of ex post moral hazard the extension of insurance coverage will lead to an increase in prices as well as to a socially undesirable increase in the number of repair service suppliers if repair markets are imperfect.
Keywords: Insurance, repair markets, incomplete contracts
JEL Classification: D43, D62, G22, I11
Suggested Citation: Suggested Citation
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