Foundations of Insurance Economics: Readings in Economics by Georges Dionne, Scott E. Harrington

By Georges Dionne, Scott E. Harrington

Economic and fiscal study on coverage markets has gone through dramatic development when you consider that its infancy within the early Sixties. Our major goal in compiling this quantity was once to accomplish a much wider dissemination of key papers during this literature. Their importance is highlighted within the creation, which surveys significant parts in assurance economics. whereas it used to be impossible to supply complete insurance of coverage economics during this publication, those readings supply a vital beginning to those that wish to behavior study and educate within the box. particularly, we are hoping that this compilation and our advent might be worthwhile to graduate scholars and to researchers in economics, finance, and assurance. Our standards for choosing articles incorporated value, representativeness, pedagogical worth, and our wish to contain theoretical and empirical paintings. whereas the focal point of the utilized papers is on property-liability coverage, they illustrate concerns, recommendations, and techniques which are acceptable in lots of components of coverage. The S. S. Huebner origin for assurance schooling on the collage of Pennsylvania's Wharton tuition made this e-book attainable by way of financing book expenditures. we're thankful for this suggestions and to J. David Cummins, govt Director of the root, for his efforts and precious recommendation at the contents. We additionally desire to thank the entire authors and editors who supplied permission to reprint articles and our respective associations for technical and monetary support.

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38Cummins and VanDerhei (1979) assumed that lower operating expenses for direct writers were prima facie evidence of superior efficiency, and concluded that regulators should take a more active role in disseminating information on prices. 24 to explain why direct writers had not grown more rapidly, he suggested that prior approval rate regulation had discouraged price cuts by direct writers, that difficulty in raising capital and obtaining consumer recognition slowed their expansion, and that it would be costly for independent agency insurers to become direct writers.

The other polar case is when costless risk categorization permits full observation of an individual risk so that information on past experience is irrelevant. While experience rating, risk categorization, and sorting contracts are used simultaneously in most markets, economic analysis to date has considered the three mechanisms independently (see Dionne and Doherty, 1990, for a more detailed review). Dionne (1983), Dionne and Lasserre (1985), and Cooper and Hayes (1987) extended Stiglitz's monopoly model (1977) to multi-period contracts.

28See Cooper and Hayes (1987), Crocker and Snow (1985), and Cresta (1984) for an introduction to these models and Dionne and Doherty (1990) for a survey on adverse selection in insurance contracts. 19 In a single period model with competition, Rothschild and Stiglitz (1976) first showed that a pooling equilibrium cannot exist if a Nash definition of equilibrium is adopted (Le, if each firm assumes that competitors' contract offers are independent of its own offer). Conditions under which "separating" contracts reveal information about insured risk were then studied by the authors.

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