Hostname: page-component-7b9c58cd5d-g9frx Total loading time: 0 Render date: 2025-03-17T06:28:09.375Z Has data issue: false hasContentIssue false
  • English
  • Français

Experimental evidence on coverage choices and contract prices in the market for corporate insurance

Published online by Cambridge University Press:  14 March 2025

Gautam Goswami ,
Martin F. Grace  and
Michael J. Rebello
Gautam Goswami
Affiliation:
Department of Finance, Graduate School of Business, Fordham University, 113 West 60th Street, New York, NY 10023
Martin F. Grace
Affiliation:
Department of Risk Management and Insurance, Robinson College of Business, Georgia State University, University Plaza, Atlanta, GA 30303
Michael J. Rebello
Affiliation:
A. B. Freeman School of Business, Tulane University, Goldring/Woldenberg Hall, 7 McAlister Drive, New Orleans, LA 70118
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, we present experimental evidence on the effect adverse selection has on coverage choices and pricing in corporate insurance markets. Two sets of experimental data, each generated by experiments utilizing a specific parameterization of a corporate insurance decision, are presented to gauge these effects. In the first, subject behavior conforms to a unique equilibrium in which high risk firms choose higher coverage and contracts are priced accordingly. Insurers act competitively and convergence to equilibrium behavior is marked. In the second set, there is little evidence that subject behavior is consistent with either of the two equilibrium outcomes supported by the experimental setting—pooling by fully insuring losses and pooling by self insuring.

Keywords

InsuranceAdverse selectionExperimental evidence

JEL classification

G22: Insurance • Insurance Companies • Actuarial Studies C90: General G14: Information and Market Efficiency • Event Studies • Insider Trading
Type
Research Article
Information
Experimental Economics , Volume 11 , Issue 1 , March 2008 , pp. 67 - 95
Copyright
Copyright © 2007 Economic Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9152-y.

References

Banks, J., & Sobel, J. (1987). Equilibrium selection in signaling games. Econometrica, 55, 647–662.CrossRefGoogle Scholar
Banks, J., Camerer, C., & Porter, D. (1994). An experimental analysis of nash refinements in signaling games. Games and Economic Behavior, 6, 1–31.CrossRefGoogle Scholar
Best's Aggregates and Averages Property and Casualty (1995). Oldwick: NJ.Google Scholar
Bond, E., & Crocker, K. (1991). Smoking, skydiving, and knitting: The endogenous categorization of risks in insurance markets with asymmetric information. Journal of Political Economy, 99, 177–200.CrossRefGoogle Scholar
Brandts, J., & Holt, C. (1992). An experimental test of equilibrium dominance in signaling games. American Economic Review, 82, 1350–1365.Google Scholar
Brandts, J., & Holt, C. (1993). Adjustment patterns and equilibrium selection in experimental signaling games. International Journal of Game Theory, 22, 279–302.CrossRefGoogle Scholar
Browne, M. (1993). Evidence on adverse selection in the individual health insurance market. Journal of Risk and Insurance, 60, 300–312.CrossRefGoogle Scholar
Cadsby, C., Frank, M., & Maksimovic, V. (1998). Equilibrium dominance in experimental financial markets. Review of Financial Studies, 11(1), 189–232.CrossRefGoogle Scholar
Cadsby, C., Frank, M., & Maksimovic, V. (1990). Pooling, separating, and semi separating equilibria in financial markets: Some experimental evidence. Review of Financial Studies, 3, 315–342.CrossRefGoogle Scholar
Chiappori, P.-A., & Salanie, B. (2001). Testing for asymmetric information in insurance markets. Journal of Political Economy, 108, 56–78.CrossRefGoogle Scholar
Cho, I. K., & Sobel, J. (1990). Strategic stability and uniqueness in signaling games. Journal of Economic Theory, 50, 381–413.CrossRefGoogle Scholar
Dionne, G., & Doherty, N. (1991). Adverse selection in insurance markets: A selective survey. In Dinne, G. (ed.), Contributions to insurance economics. Boston, MA: Kluwer.Google Scholar
Fudenberg, D., & Tirole, J. (1991). Game theory. Cambridge, MA: MIT.Google Scholar
Holt, C., & Sherman, R. (1994). The Loser's curse and bidder bias. American Economic Review, 84, 642652.Google Scholar
Myers, S., & Majluf, N. (1984). Corporate financing and investment decisions when firms have information investors do not have. Journal of Financial Economics, 13, 187–221.CrossRefGoogle Scholar
Puelz, R., & Snow, A. (1994). Evidence on adverse selection: Equilibrium signaling and cross-subsidization in the insurance market. Journal of Political Economy, 102, 236–257.CrossRefGoogle Scholar
Rebello, M. J., & Grace, Martin (1993). Financing and demand for corporate insurance: A sequential signaling game. Geneva Papers on Risk and Insurance Theory, 18, 147–172.Google Scholar
Rothschild, M., & Stiglitz, J. (1976). Equilibrium in insurance markets: An essay on the economics of imperfect information. Quarterly Journal of Economics, 90, 629–649.CrossRefGoogle Scholar
Teach, E. (1996). The rise of the alternate market, and a feeding frenzy in the conventional insurance market. CFO, 12(9), 59.Google Scholar
Thakor, A. (1982). An exploration of competitive signaling equilibria with ‘third party’ information production: The case of debt insurance. Journal of Finance, 37, 717–739.Google Scholar