A cornerstone of the IO study of selection markets is that competition disciplines sellers to customize coverage and premiums optimally. But is this the case? Using data from one of the largest Israeli commercial auto insurance providers, an affiliate of a multinational insurance company, I find there is too little adjustment in the intensive margin. Premiums barely change with expected costs as projected by pre-determined factors (vehicle age) and signals (claim history). At the same time, I find there is too much adjustment in the extensive margin, with an excessive denial of insurance in response to recent claims. Using unique grading documents, I integrate the insurer’s subjective risk assessment into the study of insurance markets. I find that the insurer's risk assessment outweighs recent claims and misevaluates vehicle age. Structural model estimates suggest that insurers enjoy incumbency advantages over their own customers, and clients are rationally inattentive to competitors’ pricing unless they are faced with a price increase. Both channels allow sub-optimal behavior to persist. Finally, I find that supply-side behavioral frictions, which result in excessive denial, mainly harm disadvantaged customers - single-fleet clients of old vehicles - and diminish with the client's fleet size.
This paper investigates the effect of competition on the incidence of tastes for discrimination. The model shows that monopolistic sellers discipline discriminatory buyers by taxing their taste for discrimination. In equilibrium, monopolistic sellers hire a lower share of White workers and pay them a lower premium than sellers in a competitive market. These results are tested in the context of the US banking deregulation that affected product market competition and quantify its impact on customer-driven labor market discrimination. Using Census/ACS data from 1960 to 2010, O*NET measures of job requirements, and GSS measures of discriminatory attitudes against Black by state, I find that the Black-White wage and employment gaps increased following bank deregulation in jobs requiring intensive contact with clients, especially in states with high measures of prejudicial preferences.
This paper studies the difference between insuring a quality uncertain good and a monetary loss. I integrate key insights from the pre-owned market into the analysis of the demand for insurance. I find that adverse selection in the resale market results in a missing insurance market. There’s a gap between the insured vehicle and the resale market’s quality, especially for new vehicles. As a result, clients over-insure their quality uncertain goods, yet demand drops over the vehicle life cycle. The partial compensation further amplifies over-insurance patterns driven by behavioral attributes. The gap results in time-trends; As the vehicle ages, demand drops, the insurance market is more adversely selected, and moral hazard increases. The incomplete compensation can explain why the demand for insurance is context-dependent, why customers over-insure limited risk, in general, and why they over-insure durable goods, in particular.