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Repeated Insurance Contracts and Learning

Palfrey, Thomas R. and Spatt, Chester (1985) Repeated Insurance Contracts and Learning. RAND Journal of Economics, 16 (3). pp. 356-367. ISSN 0741-6261.

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This article considers a repeated insurance model with incomplete information in which the insurer and the consumer both learn over time about the unknown risk category of the consumer. Care choices by young consumers affect the informational value of the accident history. Under an optimal scheme of long-term insurance contracts, young consumers will always be "subsidized" by old consumers, and consumers who are reassessed as low-risk types are always subsidizers (i.e., reverse experience ratings). We compare this optimal scheme with the set of contracts that would emerge in a competitive market if only short-term contracting were possible. These sequentially competitive contracts can lead to over-investment in care by both young and old consumers, relative to the optimum, in contrast to the underinvestment problem associated with moral hazard in insurance.

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Palfrey, Thomas R.0000-0003-0769-8109
Additional Information:© 1985 RAND Corporation. We wish to acknowledge useful comments by a referee and participants in workshops at Caltech, Carnegie-Mellon, San Diego, Stanford, and Yale and in the 1983 Winter Econometric Society meetings. The support of the National Science Foundation is gratefully acknowledged
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Issue or Number:3
Record Number:CaltechAUTHORS:20160303-110800428
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Official Citation:Palfrey, Thomas R., and Chester S. Spatt. 1985. “Repeated Insurance Contracts and Learning”. The RAND Journal of Economics 16 (3). [RAND Corporation, Wiley]: 356–67.
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:65013
Deposited By: Susan Vite
Deposited On:11 Mar 2016 00:51
Last Modified:22 Nov 2019 09:58

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