Journal of Political Economy Vol. 102 No. 2 1994
Adverse Selection, Commitment, and Renegotiation: Extension to and Evidence from Insurance Markets
Abstract
With asymmetric information, full commitment to long-term contracts may permit markets to approach first-best allocations. However, commitment can be undermined by opportunistic behavior, notably renegotiation. The authors reexamine commitment in insurance markets. They present an alternative model (which extends Jean-Jaques Laffont and Jean Tirole's procurement model to address uncertainty and competition), which involves semipooling in the first period followed by separation. This and competing models (e.g., single-period models and no-commitment models) have different predictions concerning temporal patterns of insurer profitability. A test using California data suggests that some automobile insurers use commitment to attract selective portfolios comprising disproportionate numbers of low risks.
- DOI
- 10.1086/261929
- Volume
- 102
- Issue
- 2
- Pages
- 209-235
- Language
- en
- Sources
- openalex crossref