Multidimensional private information, market structure, and insurance markets

Fang, Hanming; Wu, Zenan

doi:10.1111/1756-2171.12251

Cited by 11 publications

(9 citation statements)

References 43 publications

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“…The conditions required by Corollary 1 are related (but not equivalent) to Assumption 4 in Fang and Wu (2018), which amounts to assuming that individuals obtain higher surplus from more generous insurance, at fair prices. This is captured, in our setting, by ∂S ω ∂x > 0.…”

Section: Zero-profit Conditions On Primitivesmentioning

confidence: 99%

“…If free entry of firms is assumed, standard arguments imply that equilibrium profits are zero (e.g., Varian (2010, p. 433)). This argument was used in the context of screening markets by Rothschild and Stiglitz (1976, p. 634), Fang and Wu (2018) and others to justify focusing on equilibrium where firms breaking even. However, there are also several frameworks where the number of firms is fixed and equilibrium profits are zero (this was called the Bertrand paradox by Tirole (1988, p. 10)).…”

Section: Introductionmentioning

confidence: 99%

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On the existence of positive equilibrium profits in competitive screening markets

Levy

Veiga

2020

Games and Economic Behavior

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We assume a fixed number of symmetric firms, competition in prices, constant returns to scale and frictionless consumer choices. Consumers differ in their preferences and profitability (e.g., due to heterogeneous risk aversion and loss probabilities), which creates adverse selection. Firms can offer multiple contracts to screen individuals, in equilibrium and in any deviation. We show that equilibrium profits vanish if each consumer has a unique optimizing bundle at equilibrium prices or, more generally, if there exists a linear ordering over of contracts that dictates the preferences of firms whenever consumers are indifferent between multiple optimal contracts. For instance, equilibrium profits vanish if the marginal rate of substitution of quality for price is sharper for profit than for utility. In particular, profit also vanishes if utility equals the sum of (negative) profit, and a surplus (eg, due to risk aversion). We provide examples of economies where there exists an equilibrium with strictly positive profit and show that these examples are robust (hold for an open set of economies).

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Section: Zero-profit Conditions On Primitivesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

On the existence of positive equilibrium profits in competitive screening markets

Levy

Veiga

2020

Games and Economic Behavior

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“…13 Also see Fang and Wu (2016), who propose a slightly different model of imperfect competition. maximized under monopoly.…”

Section: Introductionmentioning

confidence: 99%

Screening and Adverse Selection in Frictional Markets

Lester

Shourideh

Venkateswaran

et al. 2019

Journal of Political Economy

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We incorporate a search-theoretic model of imperfect competition into an otherwise standard model of asymmetric information with unrestricted contracts. We develop a methodology that allows for a sharp analytical characterization of the unique equilibrium, and then use this characterization to explore the interaction between adverse selection, screening, and imperfect competition. We show how the structure of equilibrium contracts-and hence the relationship between an agent's type, the quantity he trades, and the corresponding price-is jointly determined by the severity of adverse selection and the concentration of market power. This suggests that quantifying the effects of adverse selection requires controlling for the market structure. We also show that increasing competition and reducing informational asymmetries can be detrimental to welfare. This suggests that recent attempts to increase competition and reduce opacity in markets that suffer from adverse selection could potentially have negative, unforeseen consequences.

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“…It has been shown that adverse selection can appear in a range of different market settings, whereas advantageous selection driven by asymmetric information is typically not compatible with competitive markets, since no separating equilibrium is possible under such circumstances (Chiappori and Salanié, 2013). If there are sufficiently high administrative costs, however, a negative coverage-risk correlation driven by multidimensional private information is possible even in a perfectly competitive insurance market (Fang and Wu, 2018). The methodological contribution 1 In long-term contracts, selection effects can also arise due to one-sided commitment and learning (Hendel and Lizzeri, 2003).…”

Section: Introductionmentioning

confidence: 99%

The role of heterogeneous parameters for the detection of selection in insurance contracts

Karlsson

Klohn²,

Rickayzen

2018

Insurance: Mathematics and Economics

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This study re-examines standard econometric approaches for detecting adverse and advantageous selection in insurance contracts based on variables that are not used for calculating the insurance premium. We formally demonstrate that existing strategies for detecting selection based on such 'unused characteristics' can lead to incorrect conclusions if the estimated coefficients of interest are driven by different parts of the population. We show that this issue can empirically be accounted for by allowing for heterogeneous parameters. We compare existing approaches by using simulated data with different selection regimes and test for parameter heterogeneity within the data. We further provide empirical evidence about selection into the market for private health insurance in England. Both our simulations, and the findings using real data, suggest that parameter heterogeneity is a relevant issue that can confound the interpretation of standard 'unused characteristics' approaches. Our findings are important for analysing the efficiency of insurance markets. They are of interest to both the insurance industry and policymakers, and should be accounted for when selection based on specific characteristics needs to be detected or the effects of structural changes of insurance policies/markets are to be predicted.

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Multidimensional private information, market structure, and insurance markets

Cited by 11 publications

References 43 publications

On the existence of positive equilibrium profits in competitive screening markets

On the existence of positive equilibrium profits in competitive screening markets

Screening and Adverse Selection in Frictional Markets

The role of heterogeneous parameters for the detection of selection in insurance contracts

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