DOUBLE-SIDED ADVERSE SELECTION IN THE PRODUCT MARKET AND THE ROLE OF THE INSURANCE MARKET

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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.
Publisher
BLACKWELL PUBLISHING
Issue Date
2010-02
Language
English
Article Type
Article
Keywords

IMPERFECT INFORMATION; MORAL HAZARD; WARRANTIES; CONTRACTS; DISCRIMINATION; COMMITMENT; INDUSTRY; QUALITY; MODEL

Citation

INTERNATIONAL ECONOMIC REVIEW, v.51, no.1, pp.125 - 142

ISSN
0020-6598
URI
http://hdl.handle.net/10203/94840
Appears in Collection
RIMS Journal Papers
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