Gregory P Nini

Auto insurance is often considered an industry likely to be plagued by information asymmetries: drivers seem to vary in ability, insurers collect large amounts of data about their customers, and insurers seem to use a variety of screening devices (such as a menu of choices for the amount of insurance to illicit private information. Yet recent empirical work has frequently found little evidence consistent with the theoretical predictions of models with private information. Chiappori (2000) reviews the literature testing a prediction of the Rothschild and Stiglitz (1976) model that risk and coverage are positively correlated. In general, the data do not lead to a rejection of the null of independence. Simultaneously, theoretical models of both insurance and banking markets have considered that private information may reside with an incumbent supplier relative to other competitors in the market. Given the repeated nature of insurance contracting and the large amounts of data collected by insurers, it is natural to conjecture that insurance companies may develop information monopoly power over their customers.