Multidimensional screening in insurance markets with adverse selection

Keith J. Crocker, Arthur Snow

Research output: Contribution to journalArticle

18 Scopus citations

Abstract

Bundled coverage of different losses and distinct perils, along with differential deductibles and policy limits, are common features of insurance contracts. We show that, through these practices, insurers can implement multidimensional screening of insurance applicants who possess hidden knowledge of their risks, and thereby reduce the externality cost of adverse selection. Competitive forces drive insurers to exploit multidimensional screening, enhancing the efficiency of insurance contracting. Moreover, multidimensional screening allows competitive insurance markets to attain pure strategy Nash equilibria over a wider range of applicant pools, resolving completely the Rothschild-Stiglitz nonexistence puzzle in markets where the perils space is sufficiently divisible.

Original languageEnglish (US)
Pages (from-to)287-307
Number of pages21
JournalJournal of Risk and Insurance
Volume78
Issue number2
DOIs
StatePublished - Jun 2011

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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