Consumer lock-in with asymmetric information

Nilssen, Tore

doi:10.1016/s0167-7187(98)00038-1

Cited by 36 publications

(43 citation statements)

References 29 publications

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“…In fact, as shown by Nilssen (2000), in contrast to the one-period case, pooling may occur in equilibrium in this two-period model. In the present paper, we continue this line of research and discuss the prevalence of the pooling outcome.…”

Section: Introductionmentioning

confidence: 67%

“…We calculate the pairs ¡ w AH , w AL ¢ and ¡ w NH , w NL ¢ of contracts offered by informed insurers in period 2 to old customers with and without a Þrst-period accident, respectively, in case a pooling contract is offered in period 1, deÞned in (9) above. To do this, we Þrst need to distinguish between the three cases deÞned in Proposition 4 in Nilssen (2000). For a given vector of exogenous variables, the informed Þrm offers either the RS menu for any accident history, or the RS menu to those with accidents and a CS (cross-subsidizing) menu to the others, or a CS menu to both types.…”

Section: Discussionmentioning

confidence: 99%

“…6 5 The issue of accident-record value, and the resulting scope for informational consumer lock-in, is the main focus of Nilssen (2000). Although our concerns are different, we keep the assumption, because we think it is a realistic description of insurance markets; see, e.g., the empirical support provided by Cohen (2002).…”

Section: A Two-period Insurance Marketmentioning

confidence: 99%

“…Condition (13a) parallels condition (11a) and is an incentive compatibility 7 Taking into consideration such a menu deviation is an improvement relative to the analysis in Nilssen (2000), where only single-contract deviations are considered. It should be noted, though, that the pooling equilibrium claimed to exist in Nilssen's numerical example does survive also any menu deviations.…”

Section: Pooling Cream Skimming and Dregs Skimmingmentioning

confidence: 99%

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Cream Skimming, Dregs Skimming, and Pooling: On the Dynamics of Competitive Screening

Lund¹,

Nilssen²

2004

Geneva Risk Ins Rev

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We discuss the existence of a pooling equilibrium in a two-period model of an insurance market with asymmetric information. We solve the model numerically. We pay particular attention to the reasons for non-existence in cases where no pooling equilibrium exists. In addition to the phenomenon of cream skimming emphasized in earlier literature, we here point to the the importance of the opposite: dregs skimming, whereby high-risk consumers are proÞtably detracted from the candidate pooling contract.

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Section: Introductionmentioning

confidence: 67%

Section: Discussionmentioning

confidence: 99%

Section: A Two-period Insurance Marketmentioning

confidence: 99%

Section: Pooling Cream Skimming and Dregs Skimmingmentioning

confidence: 99%

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Cream Skimming, Dregs Skimming, and Pooling: On the Dynamics of Competitive Screening

Lund¹,

Nilssen²

2004

Geneva Risk Ins Rev

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“…In this survey we shall, however, con…ne our attention to a limited subset. Many authors have proposed mechanisms to reduce the ine¢ ciency associated with adverse selection, the "self-selection mechanism" in one-period contracts that induces policyholders to reveal hidden information by selection from a menu of contracts, (Rothschild and Stiglitz, 1976;Stiglitz, 1977;Wilson, 1977;Miyazaki, 1977;Spence, 1978;Hellwig, 1986), the "categorization of risks" (Hoy, 1982;Crocker and Snow, 1985, and "multi-period contracting" (Dionne, 1983;Lasserre, 1985, 1987;Kunreuther and Pauly, 1985;Cooper and Hayes, 1987;Hosios and Peters, 1989;Nilssen, 1990;Dionne and Doherty, 1994;Fombaron, 1997bFombaron, , 2000. All of them address private market mechanisms.…”

Section: Basic Assumptions and Some Fundamental Resultsmentioning

confidence: 99%

Adverse Selection in Insurance Contracting

Dionne

Fombaron

Doherty

2013

Handbook of Insurance

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In this survey we present some of the more signi…cant results in the literature on adverse selection in insurance markets. Sections 1 and 2 introduce the subject and Section 3 discusses the monopoly model developed by Stiglitz (1977) for the case of single-period contracts extended by many authors to the multi-period case. The introduction of multi-period contracts raises many issues that are discussed in detail; time horizon, discounting, commitment of the parties, contract renegotiation and accidents underreporting. Section 4 covers the literature on competitive contracts. The analysis is more complicated because insurance companies must take into account competitive pressures when they set incentive contracts. As pointed out by Rothschild and Stiglitz (1976), there is not necessarily a Cournot-Nash equilibrium in the presence of adverse selection. However, market equilibrium can be sustained when principals anticipate competitive reactions to their behavior or when they adopt strategies that di¤er from the pure Nash strategy. Multi-period contracting is discussed. We show that di¤erent predictions on the evolution of insurer pro…ts over time can be obtained from di¤erent assumptions concerning the sharing of information between insurers about individual's choice of contracts and accident experience. The roles of commitment and renegotiation between the parties to the contract are important. Section 5 introduces models that consider moral hazard and adverse selection simultaneously and Section 6 covers adverse selection when people can choose their risk status. Section 7 discusses many extensions to the basic models such as risk categorization, multidimensional adverse selection, symmetric imperfect information, reversed or double-sided adverse selection, principals more informed than agents, uberrima …des and participating contracts.

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Adverse Selection

Fombaron

Jeleva

2004

Encyclopedia of Actuarial Science

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The standard adverse selection problem arises when individuals know their level of risk but the insurer does not. Since the individuals' informational advantage is directly related to the insurer's cost of providing a contract, adverse selection prevents the mutualization principle from working. Consequently, the insurance market may not exist for some risk types, and if it exists, may not be efficient. Several mechanisms, substituable or complementary, have been proposed in the theoretical literature to circumvent this resource allocation problem: self‐selection mechanism, statistical categorization, and multiperiod contracts.

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Consumer lock-in with asymmetric information

Cited by 36 publications

References 29 publications

Cream Skimming, Dregs Skimming, and Pooling: On the Dynamics of Competitive Screening

Cream Skimming, Dregs Skimming, and Pooling: On the Dynamics of Competitive Screening

Adverse Selection in Insurance Contracting

Adverse Selection

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