Xie, Gang
(2009)
Gender discrimination, optimal allocation and partial-pooling Nash equilibrium: essays on insurance markets with a participation option.
PhD thesis, London School of Economics and Political Science.
Abstract
The thesis is made up of three essays which study three related topics. The first essay examines the welfare effect of a non-discrimination policy, which bans using gender in pricing insurance in the context of motor insurance markets. It comprises two models. The first models comprehensive insurance markets, in which motorists decide whether to buy insurance that offers full coverage. The second model examines third-party insurance markets, in which motorists must be fully insured and agents decide whether to drive. The essay examines the welfare effects of the non-discrimination policy by examining the change of aggregate social welfare before and after the policy is implemented. It shows that in comprehensive insurance market typical adverse selection happens. Aggregate social welfare may increase or decrease. In third-party insurance market, advantageous selection happens. Aggregate social welfare may decrease after the policy implemented. The second essay endogenizes insurance coverage and finds the optimal allocation which maximizes aggregate social welfare. Agents can now choose whether to drive and whether to buy insurance, and insurers are allowed to offer a menu of cross-subsidizing insurance contracts in competitive insurance markets. The author finds pooling allocation can never maximize aggregate social welfare and the market may end up with too much insurance. The third essay examines market equilibrium and market efficiency in competitive insurance markets when agents differ in both risk probabilities and risk preferences, and can choose whether to participate in risky activity and whether to buy insurance. With different levels of risk probabilities, risk preferences, and driving benefit, the market may end up with four different separating equilibria, partial-pooling equilibrium, or even no equilibrium. The partial-pooling equilibrium is Pareto efficient under certain conditions. If it is inefficient, taxing insurance breaks the equilibrium and separating equilibrium arises, which leads to Pareto gain.
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