DOUBLE‐SIDED ADVERSE SELECTION IN THE PRODUCT MARKET AND THE ROLE OF THE INSURANCE MARKET* |
| |
| Authors: | S Hun Seog |
| |
| Institution: | 1. Seoul National University;2. The author thanks the participants in the American Risk and Insurance Association meeting in 2001 and Asia‐Pacific Risk and Insurance Association meeting in 2002 for their comments. The author also thanks Thi Nha Chau for her support. Please address correspondence to: S. Hun Seog, KAIST Business School, Korea Advanced Institute of Science and Technology (KAIST), 207‐43 Cheongryangri‐Dong Dongdaemun‐Gu, Seoul, 130‐012, Korea. Phone: +82‐2‐958‐3527. Fax: 782‐2‐958‐3160. E‐mail: . |
| |
| Abstract: | 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. |
| |
| Keywords: | |
|
|
