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DOUBLE‐SIDED ADVERSE SELECTION IN THE PRODUCT MARKET AND THE ROLE OF THE INSURANCE MARKET *
Author(s) -
Hun Seog S.
Publication year - 2010
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2009.00573.x
Subject(s) - pooling , adverse selection , product (mathematics) , business , risk pool , product proliferation , selection (genetic algorithm) , insurance policy , microeconomics , actuarial science , key person insurance , economics , marketing , new product development , geometry , mathematics , artificial intelligence , computer science , product management
I investigate the interrelation between a product market and an insurance market when adverse‐selection problems exist both in consumers and in firms. Firms offer warranties for product failures. Consumers may further purchase first‐party insurance for the residual risks of product failures. Given that the insurance market exists, two types of equilibria are possible: (a) Different firm types offer different pooling warranties attracting both good and bad consumer types or (b) good firms attract only bad consumers and bad firms attract both types of consumers. I discuss the existence and the efficiency implication of the insurance market.