Knowledge that Transforms

Search theory has been extensively and successfully applied to explain the persistence of price dispersion. This paper presents an explicitly dynamic search model which is able to account for cyclical patterns of prices and demand over time. These cyclical features of the model are the consequence of the dynamic strategic interaction between buyers and firms and do not require the presence of extraneous factors such as shocks or heterogeneity of agents in order to obtain. The model builds on earlier work by Kenneth Burdett and Kenneth L. Judd and may be interpreted as a dynamic extension of their model.

We document and attempt to explain the observation that automobile insurance premiums vary dramatically across cities. We argue that high premiums can be attributed, at least in part, to large numbers of uninsured motorists in some markets, while uninsured motorists can be attributed to high premiums. We construct a simple noncooperative equilibrium model that can generate inefficient equilibria with uninsured drivers and high, yet actuarially fair, premiums. For certain parameterizations, an efficient full-insurance equilibrium and inefficient high-price equilibria with uninsured drivers exist simultaneously, helping to explain price variability across otherwise similar cities. Policy implications are discussed.