ISSN:
1554-9658
Keywords:
adverse selection
;
insurance markets
;
marketing costs
;
pooling equilibria
;
separating equilibria
Source:
Springer Online Journal Archives 1860-2000
Topics:
Economics
Notes:
Abstract In the Rothschild-Stiglitz [1976] model of a competitive insurance market with adverse selection, pooling equilibria cannot exist. However in practice, pooling contracts are frequent, notably in health insurance and life insurance. This is due to the fact that distribution costs are nonnegligible and increase rapidly when more contracts are offered. We modify accordingly the Rothschild-Stiglitz model by introducing such distribution costs. We find that, however small these costs may be, they entail possible existence of pooling equilibria. Moreover, in these pooling equilibria, it is the high-risk individuals who are rationed, in the sense that they would be willing to buy more insurance at the current premium/insurance ratio.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1023/A:1008664000457
Permalink
