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Multidimensional Screening in Insurance Markets with Adverse Selection
Author(s) -
Crocker Keith J.,
Snow Arthur
Publication year - 2011
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2010.01376.x
Subject(s) - adverse selection , rothschild , externality , exploit , actuarial science , selection (genetic algorithm) , space (punctuation) , auto insurance risk selection , insurance policy , economics , business , microeconomics , key person insurance , computer science , computer security , archaeology , history , artificial intelligence , operating system
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.