In this paper we show that competition in the insurance markets can be bad and that adverse selection is generally worse under competition than under monopoly. The reason is that monopoly can exploit its market power to relax incentive contraints by cross-subsidization between different risk types. Cream-skimming behavior, on the contrary, prevents competitive firms from using implicit transfers. Monopoly is shown to provide better insurance but at the cost of driving some agents out of the market. However, most of the surplus is retained by the firm and, as a result, most individuals prefer competitive markets
Efficiency of competition in insurance markets with adverse selection
DE FEO, GIUSEPPE;
2009-01-01
Abstract
In this paper we show that competition in the insurance markets can be bad and that adverse selection is generally worse under competition than under monopoly. The reason is that monopoly can exploit its market power to relax incentive contraints by cross-subsidization between different risk types. Cream-skimming behavior, on the contrary, prevents competitive firms from using implicit transfers. Monopoly is shown to provide better insurance but at the cost of driving some agents out of the market. However, most of the surplus is retained by the firm and, as a result, most individuals prefer competitive marketsFile in questo prodotto:
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