Template-Type: ReDIF-Paper 1.0
Author-Name: Giuseppe De Feo
Author-Name-First: Giuseppe
Author-Name-Last: De Feo
Author-Email: giuseppe.defeo@strath.ac.uk
Author-Workplace-Name: Department of Economics, University of Strathclyde
Author-Name: Jean Hindriks
Author-Name-First: Jean
Author-Name-Last: Hindriks
Author-Email: jean.hindriks@uclouvain.be
Author-Workplace-Name: Department of Economics and CORE, Universite catholique de Louvain, Belgium
Title: Harmful competition in the insurance markets
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. However, most of the surplus is retained by the firm and, as a
result, most individuals prefer competitive markets notwithstanding their performance is generally poorer than monopoly.
Length: 19 pages
Creation-Date: 2009-10
Revision-Date: 
Publication-Status: 
File-URL: http://www.strath.ac.uk/media/1newwebsite/departmentsubject/economics/research/researchdiscussionpapers/2009/09-21.pdf
File-Format: Application/pdf
Number: 0921
Classification-JEL: G22, H20
Keywords: monopoly, competition, insurance, adverse selection.
Handle: RePEc:str:wpaper:0921