Abstract
We examine equilibria in competitive insurance markets with adverse selection when wealth differences arise endogenously from unobservable savings or labor supply decisions. The endogeneity of wealth implies that high-risk individuals may ceteris paribus exhibit the lower marginal willingness to pay for insurance than low risks, a phenomenon that we refer to as irregular-crossing preferences. In our model, both risk and patience (or productivity) are privately observable. In contrast to the models in the existing literature, where wealth heterogeneity is exogenously assumed, equilibria in our model no longer exhibit a monotone relation between risk and coverage. Individuals who purchase larger coverage are no longer higher risks, a phenomenon frequently observed in empirical studies.
Similar content being viewed by others
References
Armstrong M., Rochet J.-C.: Multidimensional screening: a user’s guide. Eur Econ Rev 43, 959–979 (1999)
Bisin A., Gottardi P.: Efficient competitive equilibria with adverse selection. J Polit Econ 114, 485–516 (2006)
Boadway R., Leite-Monteiro M., Marchand M., Pestieau P.: Social insurance and redistribution with moral hazard and adverse selection. Scand J Econ 108, 279–298 (2006)
Brown J.R.: Private pensions, mortality risk, and the decision to annuitize. J Public Econ 82, 29–62 (2001)
Brown J.R., Finkelstein A.N.: The private market for long-term care insurance in the united states: a review of the evidence. J Risk Insur 76, 5–29 (2009)
Cardon J., Hendel I.: Asymmetric information in health insurance: evidence from the national medical expenditure survey. RAND J Econ 32, 408–427 (2001)
Cawley J., Philipson T.: An empirical examination of information barriers to trade in insurance. Am Econ Rev 89, 827–846 (1999)
Chassagnon, A., Chiappori, P.: Insurance under Moral Hazard and Adverse Selection: The Case of Pure Competition. Discussion Paper, DELTA, Paris (1997)
Chetty, R., Saez, E.: Optimal Taxation and Social Insurance with Endogenous Private Insurance. NBER Working Paper No. 14403 (2008)
Chiappori P., Jullien B., Salanié B., Salanié F.: Asymmetric information in insurance: general testable implications. RAND J Econ 37, 783–798 (2006)
Chiappori P., Salanié B.: Testing for asymmetric information in insurance markets. J Polit Econ 108, 56–78 (2000)
Crocker K., Snow A.: The efficiency of competitive equilibria in insurance markets with asymmetric information. J Public Econ 26, 207–219 (1985)
De Meza D., Webb D.: Advantageous selection in insurance markets. RAND J Econ 32, 249–262 (2001)
Dubey P., Geanakoplos J.: Competitive pooling: Rothschild–Stiglitz reconsidered. Q J Econ 117, 1529–1570 (2002)
Engen, E.M., Gruber, J.: Unemployment insurance and precautionary saving. NBER Working Paper 5252 (1995)
Fang H., Keane M.P., Silverman D.: Sources of advantageous selection: evidence from the medigap insurance market. J Polit Econ 116, 303–350 (2008)
Finkelstein, A., McGarry, K.: Private information and its effect on market equilibrium: new evidence from long-term care insurance. NBER Working Paper 9957 (2003)
Finkelstein A., McGarry K.: Multiple dimensions of private information: evidence from the long-term care insurance market. Am Econ Rev 96, 938–958 (2006)
Gale D.: Equilibria and pareto optima of markets with adverse selection. Econ Theory 7, 207–235 (1996)
Hellwig M.: Some recent developments in the theory of competition in markets with adverse selection. Eur Econ Rev 31, 319–325 (1987)
Hemenway D.: Propitious selection. Q J Econ 105, 1063–1069 (1990)
Hemenway D.: Propitious selection in insurance markets. J Risk Uncertain 5, 247–251 (1992)
Jullien B., Salanié B., Salanié F.: Screening risk-averse agents under moral hazard: single-crossing and the cara case. Econ Theory 30, 151–169 (2007)
Lewis T., Sappington D.: Countervailing incentives in agency problems. J Econ Theory 49, 294–313 (1989)
Netzer N., Scheuer F.: Taxation, insurance and precautionary labor. J Public Econ 91, 1519–1531 (2007)
Netzer, N., Scheuer, F.: Competitive markets without commitment. SOI Discussion Paper No. 0814 (2009)
Rochet J.-C., Chone P.: Ironing, sweeping and multidimensional screening. Econometrica 66, 783–826 (1998)
Rothschild M., Stiglitz J.: Equilibrium in competitive insurance markets: an essay in the economics of incomplete information. Q J Econ 90, 629–649 (1976)
Smart M.: Competitive insurance markets with two unobservables. Int Econ Rev 41, 153–169 (2000)
Stewart J.: The welfare implications of moral hazard and adverse selection in competitive insurance markets. Econ Inq 32, 193–208 (1994)
Topkis D.: Supermodularity and complementarity. Princeton University Press, Princeton (1998)
Villeneuve B.: Concurrence et antisélection multidimensionelle en assurance. Annales d’Economie et de Statistique 69, 119–142 (2003)
Wambach A.: Introducing heterogeneity in the Rothschild–Stiglitz model. Journal of Risk and Insurance 67, 579–592 (2000)
Wilson C.: A model of insurance markets with incomplete information. J Econ Theory 12, 167–207 (1977)
Author information
Authors and Affiliations
Corresponding author
Additional information
We are grateful to Daron Acemoglu, Abhijit Banerjee, Felix Bierbrauer, Friedrich Breyer, Wolfgang Buchholz, Peter Diamond, Glenn Ellison, Oliver Fabel, Amy Finkelstein, Jon Gruber, Mathias Kifmann, Jim Poterba, Casey Rothschild, Harris Schlesinger, Arthur Snow, two anonymous referees and seminar participants at the Universities of Augsburg, Konstanz, MIT, Zurich and the 2007 Annual Meetings of the Risk Theory Society, the American Risk and Insurance Association, and the European Economic Association for valuable comments on earlier versions of this paper. The usual disclaimer applies.
Rights and permissions
About this article
Cite this article
Netzer, N., Scheuer, F. Competitive screening in insurance markets with endogenous wealth heterogeneity. Econ Theory 44, 187–211 (2010). https://doi.org/10.1007/s00199-009-0481-x
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00199-009-0481-x