Harmful competition in insurance markets

Giuseppe De Feo, J. Hindriks

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

There is a general presumption that competition is a good thing. In this
paper we show that competition in the insurance markets can be bad and that
adverse selection is in general worse under competition than under monopoly.
The reason is that monopoly can exploit its market power to relax incentive
constraints by cross-subsidization between different risk types.
Cream-skimming behavior, on the contrary, prevents competitive firms from
using implicit transfers. In effect monopoly is shown to provide better
coverage to those buying insurance but at the cost of limiting participation
to insurance. Performing simulation for different distributions of risk, we
find that monopoly in general performs (much) better than competition in
terms of the realization of the gains from trade across all traders in
equilibrium.
LanguageEnglish
Pages213-226
Number of pages14
JournalJournal of Economic Behaviour and Organization
Volume106
Early online date2 Jul 2014
DOIs
Publication statusPublished - 2014

Fingerprint

Monopoly
Insurance market
Insurance
Traders
Market power
Simulation
Gains from trade
Cross-subsidization
Cream skimming

Keywords

  • monopoly
  • competition
  • insurance
  • adverse selection

Cite this

De Feo, Giuseppe ; Hindriks, J. / Harmful competition in insurance markets. In: Journal of Economic Behaviour and Organization. 2014 ; Vol. 106. pp. 213-226.
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Harmful competition in insurance markets. / De Feo, Giuseppe; Hindriks, J.

In: Journal of Economic Behaviour and Organization, Vol. 106, 2014, p. 213-226.

Research output: Contribution to journalArticle

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