When Prices Hardly Matter: Incomplete Insurance Contracts and Markets for Repair Goods

35 Pages Posted: 14 Jan 2005 Last revised: 30 Oct 2012

See all articles by Martin Nell

Martin Nell

University of Hamburg

Andreas Richter

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Jörg Schiller

University of Hohenheim

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

Nell, Martin and Richter, Andreas and Schiller, Jörg, When Prices Hardly Matter: Incomplete Insurance Contracts and Markets for Repair Goods (October 30, 2012). European Economic Review, Vol. 53, pp. 343-354, 2009, Available at SSRN: https://ssrn.com/abstract=648521 or http://dx.doi.org/10.2139/ssrn.648521

Martin Nell (Contact Author)

University of Hamburg ( email )

Von-Melle-Park 5
20146 Hamburg
Germany
+49 40 42838 4014 (Phone)
+49 40 42838 5505 (Fax)

HOME PAGE: http://www.rrz.uni-hamburg.de/IfVBL/nelle.htm

Andreas Richter

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Schackstraße 4
Munich, 80539
Germany

Jörg Schiller

University of Hohenheim ( email )

Fruwirthstr. 48
Stuttgart, 70599
Germany

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