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Competing under Information Heterogeneity: Evidence from Auto Insurance

Marco Cosconati¹; Yi Xin²; Fan Wu³; Yizhou Jin⁴

¹ IVASS and Bank of Italy, Rome , · ² Division of the Humanities and Social Sciences, California Institute of Technology , Pasadena , · ³ Peking University, Shenzhen HSBC Business School,  , · ⁴ Rotman School of Management, University of Toronto Department of Management (UTSC) and  , Toronto, Canada Cosconati and Xin are co-first authors, listed alphabetically

Abstract This article studies competition under information heterogeneity in selection markets and examines the impact of public information regulations aimed at reducing information asymmetries between competing firms. We develop a novel model and introduce new empirical strategies to analyse imperfect competition in markets where firms have heterogeneous information about consumers, vary in cost structures, and offer differentiated products. Using data from the Italian auto insurance market, we find substantial differences in the precision of risk ratings across insurers, and those with less accurate risk-rating algorithms tend to have more efficient cost structures. We assess the equilibrium effects of giving firms equal access to aggregated risk information from a centralized bureau. This policy significantly reduces prices by increasing competition, leading to a 15.7% boost in consumer surplus, almost reaching the efficiency benchmark where firms have full knowledge of consumers’ true risk. Aggregating information through the bureau favours low-risk consumers and reduces average costs by 12 euros per contract through more efficient insurer–insuree matching.

DOI

10.1093/restud/rdag058

Language

en

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