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Evidence on Adverse Selection: Equilibrium Signaling and Cross-Subsidization in the Insurance Market

Robert Puelz and Arthur Snow
Journal of Political Economy
Vol. 102, No. 2 (Apr., 1994), pp. 236-257
Stable URL: http://www.jstor.org/stable/2138660
Page Count: 22
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Evidence on Adverse Selection: Equilibrium Signaling and Cross-Subsidization in the Insurance Market
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Abstract

The configuration of equilibrium in the market for automobile collision insurance is examined empirically by representing the premium-deductible menu and the demand function as a standard hedonic system. Using contractual data from a representative insurer, we estimate a reduced-form hedonic premium equation and the inverse of the marginal bid equation for insurance coverage. The data reveal an equilibrium with adverse selection and market signaling but lead us to reject the hypothesis that high risks receive contracts subsidized by low risks.

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